Incident: The company released its 2024 quarterly report on April 28. 1Q24 achieved revenue of 3.81 billion yuan, YoY -14.5%; net profit to mother of 140 million yuan, YoY -21.4%; net profit after deducting non-return to mother of 120 million yuan, YoY -29.6%. The decline in the company's 1Q24 performance was mainly due to: 1) rising prices of major raw materials such as copper and aluminum and intense competition in the cable industry, which led to a decrease in revenue from civilian products and a decrease in net profit during the reporting period; 2) delivery of aerospace products declined in the first quarter compared to the same period last year, leading to a year-on-year decrease in aerospace product revenue and net profit.

The profit margin level is relatively stable. In terms of profit margin, the company's 1Q24 gross margin was 19.2%, up 0.82ppt year on year; net margin was 4.0%, down 0.05ppt year on year. The 1Q24 profit margin level did not change much year over year. In terms of expenses, the company's expense ratio for the first quarter of 2024 was 15.0%, an increase of 1.46ppt over the previous year.

Among them: 1) sales expense ratio 2.5%, up 0.31ppt year on year; sales expenses of 100 million yuan, a decrease of 2.5% year on year; 2) management expenses rate 7.8%, up 1.22ppt year on year; management expenses of 30 million yuan, up 1.3% year on year; 3) R&D expenses rate 4.0%, up 0.36ppt year on year; R&D expenses 150 million yuan, a decrease of 6.0% year on year; 4) financial expenses ratio of 0.7%, a decrease of 0.43 ppt year on year.

Accounts receivable increased 15% from the beginning of the year; net cash flow from operating activities improved. As of the end of 1Q24, the company:

1) Accounts receivable and notes of $10.54 billion, up 15.1% from the beginning of the year; 2) Monetary capital of $3.60 billion, a decrease of 23.9% from the beginning of the year; 3) Inventory of $19.68 billion, roughly the same as at the beginning of the year; 4) Contract liabilities of $2.31 billion, a decrease of 15.2% from the beginning of the year; 5) Advance payments of $4.08 billion, up 14.3% from the beginning of the year; 6) Net cash flow from operating activities was -1.45 billion yuan for the same period last year.

Related sales are expected to increase 88% in '24; the unmanned systems business is growing at an accelerated pace. In terms of related transactions, the company: 1) The estimated amount of related procurement, labor acceptance and leasing in 24 is 1.5 billion yuan, which is the same as the estimated amount for 23; 2) The estimated amount of related sales, provision of labor services and leases in 24 is 7.5 billion yuan, an increase of 88% over the estimated amount in 23. The main reason is that China's space launch missions are expected to grow further in 2024, and the company raised the related transaction amount accordingly. In terms of the unmanned systems business, in 2023, the subsidiary Aerospace Feihong achieved revenue of 1.1 billion yuan, an increase of 125.7% over the previous year; net profit of 78 million yuan, compared to 03 billion yuan in the same period last year, the development accelerated significantly. Furthermore, the country is vigorously developing a “low-altitude economy,” and cities are scrambling to introduce relevant policies and strive for “first city status” in the low-altitude economy. In a wider range of industrial application fields, unmanned system equipment is spawning a new model of “unmanned economy” development. In the future, “drone +” will empower more and wider industries, and new low-altitude application scenarios such as terminal logistics, urban governance, and urban air traffic will emerge on a larger scale. As one of the core enterprises of large-scale unmanned system equipment in China, the company is expected to benefit deeply.

Investment advice: The company's core aerospace electronics business demand is booming. In the future, China's space launches may continue to maintain a high-frequency trend, benefit from the development of the unmanned system equipment business and satellite industry, and combine asset reforms to slim down the body, and the company's revenue is expected to continue to rise. We estimate that the company's net profit from 2024 to 2026 will be 738 million, 894 million, and 1,124 million yuan respectively. The current stock price is 36x/29x/23x, corresponding to 2024-2026 PE, which maintains a “recommended” rating.

Risk warning: downstream demand falls short of expectations; risk of price and profit margin changes, etc.