Report summary
Incident: The company announced on April 17 that in 2023, it will achieve revenue of 3,565 billion yuan (-7.16%), net profit of 192 million yuan (+3.90%), net profit after deducting non-return to mother of 177 million yuan (+26.71%), gross profit margin 24.80% (+3.21pcts), net profit margin 7.02% (+0.33pcts), and basic earnings per share of 0.13 yuan (+8.33%).
The company focused on its main business, with rapid growth in gross margin, a steady increase in R&D investment, which helped to enhance core competitiveness. Revenue in the 2023 reporting period (3.65 billion yuan, -7.16%) declined compared to the same period. Mainly due to tax policy adjustments in 2023, net profit to mother (192 million yuan, +3.90%), net profit after deducting non-net profit (177 million yuan, +26.71%) achieved rapid growth. The company has further focused on its main business, and its profitability has increased, and gross profit margin (24.80%, +3.21pcts) and net profit margin (7.02%, +0.33pcts) have steadily increased.
The company's R&D investment intensity has been greatly increased, equipment construction tasks have been fully completed, and the power of digital intelligence technology has been strengthened. During the reporting period, the company's expenses for the period ($528 million, -0.51%) and the period expenses ratio (14.83%, +0.99pcts) were generally stable. Among them, R&D expenses ($245 million, +18.70%) continued to increase as a share of revenue (6.88%, +1.50pcts). During the reporting period, 86 projects were developed, 78 technological innovations and process research were completed, annual weapons and equipment development tasks were fully completed, and research on 3 industrial ecosystems and 8 professional technology systems centered on navigation and control, military communication, and intelligent integration.
We believe that the company's continuous increase in R&D investment, especially improving capabilities related to guidance and control systems, military communications, and intelligent integrated connections to the main business, will help the company continue to enhance the competitiveness of its main business, actively promote the deepening demonstration of next-generation equipment systems, and lay the foundation for the continuous growth of the company's revenue and profit in the latter half of the “14th Five-Year Plan” and in the future.
In terms of other financial data, the company's accounts receivable ($3.336 billion, +64.23%) increased significantly during the reporting period, mainly due to the fact that some payments for products sold in the current period have not been recovered. In terms of related transactions, the company disclosed that the company had sales-related transactions in 2023 (2,676 billion yuan, -6.92%). The company made adjustments according to the business plan in 2024. It is estimated that the annual sales related transactions (all military business) will not exceed 4 billion yuan. The company revealed in its 2023 annual report that it expects to achieve revenue of 3.8 billion yuan and total profit of 290 million yuan in 2024 to ensure steady improvement of high-quality development benefits.
Guided and controlled core technology, military multi-point power companies are mainly R&D and manufacturing enterprises with military grade 2, 3 and 4 supporting military products. Their main business is “navigation control and ammunition information technology”, covering products and technologies such as guidance control, navigation control, detection and control, environmental control, stability control, radio and satellite communications, electrical connectors, and unmanned cruise.
The company's three main holding/participating subsidiaries: Hengyang North Optoelectronics (90.69%), Zhongbing Communications (48.44%), and China Military Aviation Federation (52.01%). Hengyang North Optoelectronics's main business is manufacturing and sales of electronic control boxes and inspection systems, etc., operating revenue (220 million yuan, +13.17% 6), net profit (0.7 million yuan, +168.51%), smooth and orderly operation, and rapid profit growth.
China Bing Communications (the company holds 48.44% 6)'s main business is the production and sale of military, dual-use communication and electronic equipment. Its main products are ultra-shortwave communication equipment and satellite communication equipment, which are widely used in military fields such as land, sea, and air. Revenue (445 million yuan, -16.43%), net profit (53 million yuan, -38.52% 6), and gross profit margin (37.17%, -5.17pcts) declined year-on-year during the reporting period. The main reason for the decline in performance was due to changes in the company's sales product structure and an increase in the cost and expense ratio. During the reporting period, several important scientific research projects of Zhongbing Communications made breakthrough progress. A total of 12 types of equipment successfully completed the scientific research phase and entered the conversion stage. We believe it is expected to be realized until the 2024 profit statement.
China Military Aviation Federation (52.01% of the company's shares, +0.05pcts) achieved revenue (332 million yuan, -5.72% 6), net profit (0.52 million yuan, +4.69% 6), gross profit margin (53.10%, +1.36 pcts), R&D expenses (0.19 billion yuan, +57.56%), mainly engaged in military products business. Its main products are electrical connectors, wiring harnesses and other connection systems. It is a national “specialized, new giant” enterprise and an excellent supplier of military electrical connectors.
We believe that the current demand for practical training and preparation has spawned “expendable additions to mature models of equipment” of ammunition and equipment and an increase in “standardized mass production of new models of equipment”, forming the underlying logic of the boom in the ammunition sector during the “14th Five-Year Plan.” At the same time, the company's guidance and control informatization field: as an area with a relatively high value in ammunition equipment, strong downstream demand will continue to be reflected in the company's performance in the latter half of the “14th Five-Year Plan” period.
Investment advice
We believe that 1) As a listed guidance system company under the Ordnance Industry Group, the guidance products are the high-value part of guided missiles/ammunition. The company's fundamentals are trending over the long term, the downstream boom is high, and the growth logic remains unchanged. In the future, the company will fully benefit from both “expendable supplements for mature models of equipment” and “fixed mass production of new models of equipment” of ammunition. The company's military product performance is expected to continue to grow steadily, and the high point of increase in production capacity may gradually be reflected in the profit statement in the latter half of the “14th Five-Year Plan”;
2) With the launch of China's national defense informatization construction in the “14th Five-Year Plan”, military defense informatization construction is expected to grow rapidly. It is expected that the number of military communications equipment purchased in China will grow rapidly, and military communications and satellite communications will usher in rapid development opportunities, which will benefit the company's related market expansion and form a new driving force for performance growth; 3) The company continues to promote “data-driven smart factory” construction and “human-robot collaborative manufacturing” to improve production efficiency, so that the company's marginal production costs improve, and the gradual emergence of scale effects will also benefit the company's profit step by step Improvement; 4) The company revealed in its 2023 annual report that it is expected to achieve operating revenue of 3.8 billion yuan and total profit of 290 million yuan in 2024 to ensure a steady improvement in high-quality development benefits.
Based on the above views, we expect the company's revenue for 2024-2026 to be 3,988 billion yuan, 4.822 billion yuan and 5.975 billion yuan respectively, net profit to mother of 220 million yuan, 276 million yuan and 344 million yuan respectively, and EPS 0.15 yuan, 0.18 yuan, and 0.23 yuan respectively. Based on the company's industry position and future development prospects, we maintain a “buy” rating. The target price is 10.80 yuan/share, which corresponds to 72 times, 60 times and 47 times the predicted revenue for 2024-2026.
Risk warning
Delivery of military products falls short of expectations, the continuation of the expansion of the civilian goods market falls short of expectations, and the procurement needs of military customers are volatile