Key points of investment:

Solid-state engines are a bottleneck in the production capacity of the missile industry chain

According to Yan Siming's “US Department of Defense Stimulates Production Increase in Major Missile Projects” report, when the US Department of Defense plans to expand missile production, there are production bottlenecks in the supply chain in areas such as solid rocket engines. To target foreign countries, if domestic demand for missiles grows rapidly or pulsed orders occur, solid rocket engines may also experience production capacity bottlenecks. Prices of some products fluctuate due to mismatches between supply and demand, and the position of related companies in the industrial chain will rise.

Solid engine technology and high qualification barriers

The engine power module production process includes various processes such as filling, pouring, and shaping. The process is complicated, difficult, highly customized, and has high technical barriers and qualification barriers. According to the relevant scientific research licenses obtained, the company's main domestic solid engine competitors are subordinate units of military central enterprises such as Aerospace Science and Technology, Aerospace Science and Industry; the company is an important military industry group in China, and the operating mechanism is flexible.

Raising capital is conducive to the rapid increase in the company's production capacity and market share. The company went public in June 2023. The capital raised 1.443 billion yuan, and the capital was used to coordinate planning and construction projects; the investment of large amounts of capital is conducive to the expansion of the company's production capacity. According to statistics on the 4 listed companies related to ammunition and pyrotechnics, only Guoke Military has plans to increase capital and expand production after 2018. If industry demand is released quickly, Guoke Military Industry-related production capacity will be more responsive, and the market share is expected to increase.

The promotion of technology reform projects drives a rapid increase in per capita output

Benefiting from the company's increased investment in technology reform projects and improved production efficiency, the company's per capita income increased from 0.3464 million yuan in 2019 to 1.2096 million yuan in 2023. The 4-year CAGR was 36.70%, and per capita income increased rapidly. Benefiting from factors such as an increase in revenue scale and a decrease in fixed cost amortization, the company's period expense ratio was reduced from 37.97% in 2019 to 16.01% in 2023, a decrease of 21.95pct, and the effect of improving quality and efficiency was remarkable.

Profit Forecasts and Ratings

We expect the company to achieve operating income of 1.296/1.635/2.041 billion yuan in 2024-2026, a year-on-year increase of 24.55%/26.18%/24.86%, three-year CAGR of 25.19%; net profit to mother of 0.193/0.263/0.342 billion yuan, a year-on-year increase of 36.84%/36.86%/29.81%, three-year CAGR of 34.46%, and EPS of 1.10/1.50/1.95 yuan/share. Corresponding PE is 34x/25x/19x, respectively. In view of the company's deep technical skills, broad market space, and scarcity of solid engine standards, it was given a “buy” rating.

Risk warning:

Risk of falling military orders; risk of technology research and development falling short of expectations; risk of falling gross margin of military products; risk of increased industry competition; risk of production safety.