Event: The company announced on April 16 that it will achieve revenue (0.851 billion yuan, +6.14%), net profit to mother (0.079 billion yuan, +22.00%), gross profit margin (40.17%, -1.19pcts), and net profit margin (9.59%, -0.27pcts) in 2023. The company announced on April 25 that in the first quarter of 2024, the company achieved revenue (0.183 billion yuan, -20.31%), net profit to mother (0.01 billion yuan, -11.53%), gross profit margin (33.72%, -2.93pcts), and net profit margin (5.31%, +0.00pcts).

Revenue continued to grow rapidly, and net profit to mother reached a record high

In 2023, the company's operating income (0.851 billion yuan, +6.14%), net profit attributable to mother (0.079 billion yuan, +22.00%), net profit margin (0.063 billion yuan, +4.25%), gross profit margin (40.17%, -1.19pcts), net profit margin (9.59%, -0.27pcts). The company's operating income, net profit attributable to mother, and net profit after deduction reached record highs, mainly due to the company's increased market development efforts in 2023 and the optimization of the product business structure.

Judging from the business structure, the company's business is mainly divided into three categories: RF coaxial connectors, RF coaxial cable components, and low frequency connectors. In 2023, the company's RF coaxial connector business (0.354 billion yuan, -10.28%) accounted for revenue (41.53%, -7.60pcts), and gross profit margin (39.78%, -3.65pcts). The company's RF coaxial cable component business revenue (0.294 billion yuan, +70.96%), achieved a significant increase in revenue (34.58%, +13.11pcts), and gross profit margin (41.21%, +3.26pcts). The business revenue has maintained its growth trend since 19 years, and gross margin has risen. RF coaxial cable components are mainly composed of two parts: an RF coaxial connector and an RF coaxial cable. As the integrated development of RF connectors continues to be upgraded, its revenue and revenue share is expected to continue to increase.

The low frequency connector business (0.138 billion yuan, -11.81%), revenue share (16.24%, -3.31pcts), gross profit margin (42.28%, -2.91 pcts), both revenue share and gross margin declined.

Looking at the 2024Q1 single quarter, the company achieved a rise in revenue (0.183 billion yuan, -20.31%), net profit to mother (0.01 billion yuan, -11.53%), gross profit margin (33.72%, -2.93pcts), net profit margin (5.31%, +0.00pcts) o expenses in the first quarter of 2024, in 2023, the company's three fee rate (21.52%, +0.54pcts)) increased. The sales expense ratio (4.68%, +0.41pcts) has increased, mainly due to employee salary issues such as wage increases, social security base increases, etc., as well as the company's increased market development efforts and increased market development expenses. The financial expenses ratio (1.80%, -0.38pcts) has declined, mainly due to a decrease in bank loan interest rates and an increase in interest income from listed fund-raising special accounts. Meanwhile, the company's R&D expenditure rate (6.57%, +0.43pcts) was further increased, reaching a record high. Judging from the company's R&D projects, it is still focused on the company's traditional areas of advantage, such as connectors and cable components, and is highly compatible with the company's business related to its IPO fund-raising projects. It is also expected to become the core driving force for the company's revenue expansion and continued rapid growth in performance.

In 2023, the company's inventory was 0.393 billion yuan, a year-on-year decrease of 12.77%, and the inventory size decreased. Furthermore, in terms of inventory volume, the company's inventory volume decreased by 48.75% year on year. On the one hand, the company increased its market development efforts, and on the other hand, the company strengthened inventory management to improve the company's operating efficiency.

In terms of cash flow, the company's net increase in cash and cash equivalents in 2023 increased significantly from -1.1785 million yuan in 2022 to 0.671 billion yuan. This is mainly due to the amount of capital raised during the IPO listing.

The categories include high reliability, military grade, and industrial grade. The company, which is widely used in product levels, was formerly the state-owned 853rd factory. It was founded in 1966 and is one of the earliest manufacturers of electrical connectors in China. At present, the company has formed three types of products: RF coaxial connectors, low frequency connectors, and RF coaxial cable components, which are widely used in aerospace, weapons, communications and other fields. According to the different downstream application areas and product models, the company divides product quality grades into high reliability grade, military grade, and industrial grade.

High-reliability electrical connectors and interconnect products are used in various key national spacecraft projects, including key projects such as the “Chang'e Moon Exploration Series”, “Shenzhou Spacecraft Series”, “Beidou Satellite Navigation System”, “Tianwen Mars Exploration System”, “Tiangong Space Station”, “Long March Series Launch Vehicle”, and “High Score Remote Sensing Satellite Series”. The product application range covers various fields of space such as high-orbit satellites, low-orbit satellites, manned spacecraft, space cargo spacecraft, space stations, rockets, and deep space exploration.

Military-grade electrical connectors and interconnect products are used in various types of weapons and equipment, including various electronic equipment systems such as missiles, early-warning aircraft, ships, etc., especially in various phased array radar systems.

Industrial-grade electrical connectors and interconnect products are widely used in communication systems. They are qualified suppliers of electrical connectors and interconnect products for large telecommunications companies such as Huawei and ZTE. The products are widely used in fourth generation and fifth generation mobile information systems.

The company is in a leading position in the industry in the design, development and precision manufacturing of electrical connectors and interconnect products. According to the China Electronic Components Industry Association, China Electric is a leading Japanese and German company (based on the main business of Congkou Qiang Enterprise), the company ranks among the top in the field of military electrical connectors. As a large-scale backbone enterprise for the development and production of electrical connectors in China, the core enterprise of military RF coaxial connectors, and the vice chairman unit of the Electric Connector Branch of the China Electronic Components Industry Association, the company is currently in a leading position in the domestic field of military RF coaxial connectors and cable components.

Networking in the satellite sector is accelerating, 5G-A continues to advance, and downstream demand is booming, and the overall global connector market size is rising in 2023. With the expansion of the downstream terminal market and the upgrading of technology, China, as the world's largest connector market, is still growing rapidly. In 2023, China is expected to account for 30.9% of the global connector market.

Looking at the company's downstream sector, the company mainly targets weapons and equipment, aerospace, industrial fields, etc.

In the field of weapons and equipment, benefiting from military modernization, the requirements for localizing electronic components are increasing. Along with the continuous increase in the level of military informatization and the acceleration of military modernization, it is expected to bring about an increase in demand for a large amount of new equipment. As a core component of military products, military connectors themselves are growing rapidly in demand and further increasing localization requirements to provide large market space for leading domestic connectors companies.

In the aerospace field, according to the “Basket Paper on China's Aerospace Science and Technology Activities (2023)” F 2U24, 2024 is a critical year to fully achieve the goals and tasks of the “14th Five-Year Plan” and accelerate the construction of an aviation power. China Aerospace is expected to carry out about 100 anti-aircraft missions throughout the year (with a year-on-year growth rate of nearly 50%), which is expected to set a new record. China's first commercial space launch site will usher in the first launch mission. Multiple satellite constellations represented by Starnet and G60 will accelerate network construction. The company's high-reliability connectors and cable products are expected to benefit from the continuous development of China's satellite field.

At the same time, according to the company's IPO capital raised, the net amount of capital raised reached 0.647 billion yuan, of which 0.339 billion yuan was invested in the satellite interconnection high-reliability connection system industrialization project (construction period of 3 years), 95 million yuan was invested in R&D center construction projects, and 0.1 billion yuan was used to supplement working capital. According to the company's prospectus, the main products of the satellite interconnection high-reliability connection system industrialization project are board-to-board high-reliability RF connectors and low-loss steady phase RF cable components, 1mm spacing high-reliability micro-rectangular connectors, and high-reliability board-to-board connectors and cable components for 5G terrestrial base stations. Among them, inter-board high-reliability RF connectors and low-loss stable phase RF cable components are mainly used in the Aerospace Science and Technology Group's national key satellite projects, 1mm spacing high-reliability micro-rectangular connectors have been used in batches in defense products and have already signed intended requirements with multiple user units. Interboard connectors for ground base stations are widely used in 5G and next-generation communication base stations. The industrialization project includes the company's high-reliability, military grade, and industrial-grade product categories. It is expected to solve the problem of localization substitution in China's electrical connector industry, and the project is expected to further enhance the company's profitability after delivery.

In the industrial sector, according to the latest data from the Ministry of Industry and Information Technology, by the end of 2023, the total number of 5G base stations in China reached 3.377 million. With the further popularization of commercial use of 5G communications and the advancement of 5G-A communication construction, the field of communication applications continues to expand. Application fields such as the NEV market, artificial intelligence, and the Internet of Things have also ushered in a stage of rapid development, and the size of the connector market will continue to grow in the future.

We believe that, benefiting from the continuous improvement of the downstream launch capacity of the satellite industry in the “14th Five-Year Plan”, the satellite manufacturing sector is expected to gradually break away from the traditional project system and gradually enter the mass production stage; at the same time, along with the improvement in the “quality” and “quantity” of various types of weapons and equipment; and the continuous development of China's communications industry in the 5G and next-generation communication fields, the application rate and demand for the company's high-reliability, military grade, and industrial grade products are expected to grow rapidly. This will form a continuous driving force for the company's revenue growth in the next few years.

Local state-owned holdings bind the core backbone to stimulate employees' endogenous motivation. Formerly known as the state-owned 853rd factory, it is now a state-owned enterprise in Shaanxi Province. The company launched equity incentives in 2019. 61 core technical and management personnel, important technical and management personnel, technical and management cadres participated, and 61 core employees held a total of 7.01% of the shares at the time of completion. Furthermore, during the listing, the company's senior management and core employees set up special asset management plans to participate in the strategic placement.

Key shareholding by core employees will form a community of risk and interest between capital owners and workers, establish an effective mechanism for risk sharing and benefit sharing, effectively attract, motivate and stabilize key talents needed for the company's development, and ensure the company's long-term sustainable development.

Investment advice

The company is one of the earliest manufacturers of electrical connectors in China. It is in a leading position in the field of military RF coaxial connectors and cable components. The products cover high reliability, military grade and industrial grade, and are widely used in aerospace, phased array radar, 5G and next-generation communication fields. The specific investment suggestions are as follows: 1. From the demand side, as China's satellite manufacturing sector is expected to gradually break away from the traditional project system and gradually enter the mass production stage, the company's high-reliability connectors and cable component products are expected to benefit from this process to help the company's performance grow.

2. From the supply side, the company passed CNAS certification in 2023, further improving its testing capabilities and helping the company develop highly reliable products.

3. It is recommended to pay attention to changes in the company's product structure under the integrated development trend of the connector industry.

Based on the above view, we expect the company's operating revenue for 2024-2026 to be 1.008 billion yuan, 1.16 billion yuan and 1,346 billion yuan respectively, with net profit attributable to mother being 0.098 billion yuan, 0.119 billion yuan and 0.141 billion yuan respectively, and EPS of 0.91 yuan, 1.10 yuan, and 1.30 yuan respectively. We covered it for the first time and gave it a “buy” rating. The target price was 58 yuan, corresponding to 63.74 times, 52.73 times, respectively. 44.62 times PE

Risk warning

The company's IPO fund-raising and production expansion project progressed or fell short of expectations; risk of fluctuations in raw material prices; downstream demand falling short of expectations; project construction falling short of expectations; market expansion falling short of expectations, etc.