The company is a military research and manufacturing enterprise mainly engaged in R&D, production and sales of products such as high-speed automatic fire extinguishing and explosion suppression systems, high-energy aviation ignition and discharge devices, and high-precision fusing devices. Relying on core technology accumulated over many years, rich military research and production experience and strict production management, the company integrates core devices and systems in the field of comprehensive protection as the main development direction. It has long been committed to providing electronic protection products for high-risk fields. Currently, it has become a first-level supplier of military machinery/general units, and has been recognized by military users.
Main business revenue continued to grow, and technical advantages enabled product competitiveness. In 2023, the company achieved operating income of 1404.827 million yuan, an increase of 26.84% over the same period of the previous year, and net profit attributable to owners of the parent company of 49.7043 million yuan, an increase of 10.64% over the same period last year. The company's main product, the fire extinguishing and explosion suppression system, is a sub-system of the vehicle. Demand is affected by the vehicle's annual tasks. Orders for fire extinguishing and explosion suppression system products increased in 2023, so the company's revenue increased in 2023. The company's overall expense ratio remained stable from 2018 to 2022. From 2018 to 2021, the company's gross margin increased steadily from 55.10% to 73.08% year by year, mainly due to the company's strengthened management, income from idle funds, and increased government subsidies.
There is still market space for ground weapons, and the midstream is expected to benefit from the growth of downstream vehicle equipment. The downstream targets of the company's fire extinguishing and explosion suppression systems are mainly armored vehicles and other weapons. Fire extinguishing and explosion suppression systems play an important role in improving the combat capability and occupant survivability of equipped vehicles and other equipment. There is still room for growth in the number of armored combat vehicles in China; in terms of the advanced nature of armored vehicles, China still has great room for development; in terms of policy, China's share of equipment costs is rising year by year. We believe that with a rise in the military budget and an increase in the proportion of superimposed equipment expenses, China's equipment procurement amount is expected to continue to rise. The boom in downstream growth is expected to gradually be transmitted upstream, and the company may benefit from the trend of expanding and replacing downstream armored vehicles.
Downstream is expanding the direction of aviation platforms. The civil sector market needs to be deepened. The company has now signed a “technology development contract” with a research institute under China Aviation Industry Corporation. The company has been commissioned by a research institute under China Aviation Industry Corporation to develop and deliver products for aviation equipment engine cabin fire alarm systems. We believe that there is still a large market space for the application of the company's fire extinguishing and explosion suppression systems on aviation platforms, and that aircraft platforms may strongly expand the company's fire extinguishing and explosion suppression system business revenue in the future.
Military electronic components are constrained by imports, and the domestic replacement rate needs to be increased. Currently, a significant proportion of China's military equipment still uses electronic components imported from abroad, but there are problems with the use, upgrading, and maintenance of such electronic components. At present, the process of localizing and replacing UV photocells, the core component in fire extinguishing and explosion-proof systems, still needs to be accelerated, and the company has accelerated its capacity building for independent production. The company has a wide product coverage, strong production line advantages, and at the same time has good customer resources, making it easier to obtain market initiative.
Profit forecast and rating: We believe that the downstream ground armor deployment trend of the company's core products, fire extinguishing and explosion-proof systems, is unabated, and the direction of civil use of aviation platforms is yet to be expanded. The domestic replacement logic for device products is clear, and the company has become the mainstay of domestic electronic components with its technical research advantages. Under this assumption, the company's net profit due to mother for 2024-2026 is estimated to be 67 million yuan, 93 million yuan, and 130 million yuan, respectively. The corresponding EPS is 0.84 yuan/share, 1.17 yuan/share, and 1.62 yuan/share, respectively. A 24-year PE of 40-45x is given, corresponding to the target price range of 33.6-37.8 yuan/share. The first coverage gives a “buy” rating.
Risk warning: There is a risk of dependence on the Chinese weapons industry group, the risk of revenue growth being dependent on military tenders, the risk of a single product, the risk that the company's products have not completed military product reviews, and risks related to subjectivity.