Incidents:

The company released its 2023 annual report. In 2023, it achieved operating income of 246 million yuan, -6.47%; gross profit margin of 19.55%, a year-on-year decrease of 5.77pct; net profit to mother - 185 million yuan, loss +15.97% year over year; net profit after deducted from mother - 191 million yuan, loss +16.37% year-on-year. Non-recurring profit and loss mainly comprised of changes in the fair value of government subsidies and other non-current financial assets.

Comment:

Accelerate the expansion of the smart government market, putting pressure on performance in the short term. The company has been deeply involved in the smart government market for many years, covering various businesses such as digital files and smart traceability management platforms. Smart government's revenue for 23 years was 206 million yuan, -8.39% year over year, and gross margin was 16.96%, down 11.23 pcts year on year. The company increased its market expansion efforts in 2023, but due to tight budgets and insufficient demand from target customers, the signing of new projects fell short of expectations. At the same time, the acceptance and repayment rate of existing projects declined due to tight customer funds. Two reasons put pressure on the company's short-term performance.

Intelligent transportation is being laid out in depth, and demand is gradually being released. The actual controller of the company is a state-owned enterprise Transportation Communications Group directly under the China Communications Information Center under the Ministry of Transport, and holds 51% of the shares in Communications Beidou (Hainan) and Jiaoxin Beidou (Zhejiang). The smart transportation business revolves around “Beidou +”, including Beidou free flow mileage fees, vehicle networking, and intelligent infrastructure. It achieved revenue of 39 million yuan, +1365.72% year over year; achieved gross profit of 0.16 million yuan, +741.33% over the same period last year.

The company focused on promoting the development of the smart transportation business. In April 2023, it completed an additional distribution of 700 million yuan for the Beidou free flow project and supplementary liquidity. The business revenue is beginning to bear fruit.

The low-altitude industry is booming, and integrated land and air systems promote Beidou applications. The industrial application of Beidou entered the fast track of development during the “14th Five-Year Plan” period. The low-altitude industry ushered in a period of rapid development, and the domestic low-altitude economy market is expected to exceed trillion dollars. The company's actual controller, Transportation and Communications Information Group, is committed to promoting the implementation of development strategies such as “developing an integrated communication system between heaven and earth and providing comprehensive three-dimensional traffic informatization services”. It has been approved by the State Council to legally provide aviation safety communication services in China for nearly 40 years, which is expected to empower the company's development. Jiaoxin Beidou (Zhejiang) Technology Co., Ltd., a holding subsidiary of the company, is focusing on developing new productivity, combining drones and Beidou satellite systems to develop a land-air integrated traffic infrastructure health monitoring system. Through drone cruising and sensors on traffic infrastructure, it monitors and early warns bridges, slopes and health conditions in real time to provide guidance for removing road diseases and intelligent maintenance; relying on low-altitude airspace and the Beidou system to provide new solutions for intelligent traffic management.

Profit forecast: The company's net profit for 2024-2026 is expected to be -0.95/0.96/201 million yuan, respectively, 33/16 times PE in 25/26, giving the company a PE valuation of 50 times the profit of 2025E, corresponding to a target price of 19.35 yuan. The first coverage will give it a “buy” rating.

Risk warning: profit forecasts and valuation judgments fall short of expectations, business development falls short of expectations