Core views

The company is one of the few innovative enterprises in the industry that not only has independent core intellectual property rights, but also has a deep understanding of the needs of industry customers. The entire industry chain layout of “chips, modules, terminals, base stations, and systems” in the 5G era has been formed to provide equipment and overall solutions for private broadband mobile communication systems. There are plenty of ongoing projects, laying the foundation for sustainable development.

The company also began the development of low-orbit satellite communication subsystem equipment and successfully won the bid. Subsequent low-orbit satellites are expected to continue to contribute to the company's performance growth. We are optimistic about the company's future development trends.

occurrences

The company released the 2023 annual report and the 2024 quarterly report. Revenue for 2023 was $313 million, net profit to mother was $190 million, -321.74% year on year; revenue for the first quarter of 2024 was 68 million yuan, -11.80% year on year, and net profit to mother was -0.1 billion yuan, increasing losses.

Brief review

1. Performance was under pressure in the short term, and gross margin recovered to a high level.

2023 revenue of $313 million, -21.93% YoY, net profit to mother - $190 million, -321.74% YoY, net profit after deduction - $225 million, -435.54% YoY. 23Q4 revenue was 97 million yuan, +571.9% year-on-year, and net profit to mother - 127 million yuan, an increase in year-on-year losses. In 2023, due to changes in external industry policies and other factors, the company's main business was greatly impacted, and revenue and profits declined. In addition, the company increased its investment in scientific research in new technologies and products such as 5G and next-generation tactical communication systems, and R&D personnel and R&D expenses grew rapidly, putting obvious pressure on the company's overall business performance this year.

Revenue for the first quarter of 2024 was 68 million yuan, -11.80% year-on-year, and net profit to mother of 0.1 billion yuan. The loss increased, and net profit to mother after deduction was -0.13 billion yuan, a year-on-year decrease. The company's performance was still unrepaired due to the impact of the industry, and continued investment in R&D put pressure on the company's performance.

The gross margin in 2023 was 43.34% (-16.03pcts), and the net profit margin was -60.67% (-82.03pcts). The net interest rate changed from positive to negative, mainly affected by a significant decline in gross margin and a significant increase in R&D expenses. The cost rate for the period was 104.81% (-62.42pcts), of which the sales rate was 11.50% (+3.82pcts), mainly due to the increase in various expenses of the company to actively expand its business; the management rate was 13.86% (+5.04pcts), mainly due to the suspension of payment of social insurance premiums due to the 2022 pandemic in 2023

Also, the increase in housing depreciation costs, the R&D rate was 81.52% (+47.34pcts), mainly due to the company's 2022 accounting standards and accounting policies for capitalizing R&D expenses, and the 2023 R&D capitalization project was carried over to intangible assets for intended use and began to be amortized; the financial rate was -2.07% (+6.22pcts), mainly due to an increase in interest expenses on loans from financial institutions and a decrease in interest income on deposits. The share of all expenses on the cost side increased year-on-year, and R&D expenses increased significantly. The main reason was for the company to actively expand its business and lay the foundation for future growth in the company's performance.

In the first quarter of 2024, the company's gross margin was 65.11% (+3.14pct), the net profit margin was -14.74% (-4.01pcts), and the 24Q1 gross margin improved significantly. Affected by the decline in expenses and revenue scale, the company's net interest rate was still negative, and it is expected to recover in the future as the company's revenue scale grows.

2. Continue to increase investment in R&D to enhance the competitive strength of enterprises.

Since its establishment, the company has focused on research on key broadband mobile communication technologies. After more than ten years of R&D accumulation, by the end of December 2023, it had 42 core patents and 115 software copyrights. The core intellectual property rights are independent and controllable, and it has rapid customized R&D capabilities. Although model products require a long cycle of 3-5 years from project establishment to completion of the finalization work, the life cycle of model equipment is also longer than that of non-model products. By the end of 2023, the company had established and is developing multi-type equipment. The new model product continues to expand in multiple fields and industries, laying the foundation for sustainable development: the wireless communication system based on the (nationally produced) SDR platform is in the certification stage and delivered in small batches; a miniaturized, lightweight, localized product with self-organized network communication capabilities and suitable for in-vehicle use is in the normal development stage; wireless broadband products with large-scale networking capabilities have successfully completed product status identification and batch delivery; 5G product development projects based on industry requirements are in the positive phase. Small-batch trial; the single-person communication information system project suitable for multiple scenarios has completed the first phase and is being prepared for the second phase; large-scale drone cluster networking and broadband command product development projects are in the prototype selection stage, etc. The company has sufficient projects and is progressing smoothly, and it is expected that it will continue to provide impetus for the company's performance growth in the future.

3. The company achieved remarkable results in 5G and terminal communication, and expanded low-orbit satellites to win the bid.

The company carried out strategic cooperation with the overall unit to verify the important role of our 5G products in informatization in the field of detachments and individual soldiers. It has laid a solid foundation for the subsequent development of new models of equipment and seeking more shares. The company participated in the first phase of the background research project in the field of individual soldiers, and was successfully shortlisted for the self-organizing network topic through the collection of excellence, and has entered the development team of a new generation of individual soldiers. It is expected to become a new model of equipment in the second phase of background research. The company was successfully shortlisted for 5G technology selection for ships and became one of the 5G suppliers; successfully shortlisted for the second phase of a 5G and microwave network transmission competition for a communication system; and successfully won the bid for a 5G private network lightweight core network and 5G unmanned platform module development project. At the same time, the company successfully won the bid for the relevant low-orbit satellite constellation ground-based base station and test terminal development project, and the first batch of products was successfully delivered at the end of the year. The company won the bid for the development of the first phase of the low-orbit satellite constellation satellite communication payload product. As the undertaker of the constellation's communication subsystem, it is responsible for the guarantee and support of the constellation's communication subsystem, and the development and supply of key communication equipment such as related satellite communication payloads and satellite communication terminals. The payload is expected to be put into operation in 2024, in line with the 2024 launch plan for the relevant constellation. The successful expansion of the low-orbit satellite business is expected to add to the company's future performance.

4. Investment advice and profit forecast.

The company is one of the few innovative enterprises in the industry that not only has independent core intellectual property rights, but also has a deep understanding of the needs of industry customers. Form a full-industry chain layout of “chips, modules, terminals, base stations, and systems” in the 5G era to provide equipment and overall solutions for private broadband mobile communication systems. The company also began the development of low-orbit satellite communication subsystem equipment and successfully won the bid. Subsequent low-orbit satellites are expected to continue to contribute to the company's performance growth. We estimate that the company's net profit for 2024-2026 will be 96 million yuan, 152 million yuan, and 281 million yuan, respectively. The PE corresponding to the current market value will be 104 times, 65 times, and 35 times, respectively, maintaining the “increase” rating.

Risk analysis

Market competition has intensified. With the vigorous development of national defense informatization construction, the market demand for the private network broadband mobile communication industry has also ushered in a relatively rapid pace of development. More and more research institutes and private enterprises have begun to step up research and development efforts and gradually participate in market competition in this field. If potential competitors continue to enter, it will gradually increase market competition in the private network communication industry, and the company will face the risk of a decline in market share due to increased competition in the industry.

Fluctuations in customer purchase orders. Customer procurement is characterized by strong planning and a long project cycle. Generally, it is tested and approved through small-batch procurement, then continuous large-scale procurement is carried out. However, since sales of the company's products need to meet customer procurement requirements, if customer procurement plans change, the company's product sales will be greatly affected, resulting in a certain degree of uncertainty about the company's operating income.

The risk of pricing fluctuations in price evaluation, negotiation and bidding methods. The company's fixed products generally use a price review method to determine the price. Due to the long price review cycle, there are situations where the order contract is signed at the provisional price before the price is approved, and the customer will adjust according to the final price after the price review is completed. The company's non-standard products generally use competitive negotiations, bidding, etc. to determine the price. Among them, the company participated in communication equipment procurement projects of some units through competitive negotiations and bidding. Since such projects often require customization, various factors such as product quality and price determine whether the company can finally win the bid. If in the process of participating in this type of project in the future, the company fails to win the bid due to the higher final price of the product, or the company's final bid price is lower, it will cause some fluctuations in the company's future profit level.