Key points of investment:

The company is one of the few high-tech enterprises and innovative enterprises with independent research and development capabilities for broadband mobile communication systems in China. It has formed a “chip-module-terminal-base station-system” industry chain layout in the 5G era. In 2018-2021, the company's revenue increased from 0.43 billion yuan to 0.73 billion yuan, and the 3-year CAGR was 19.6%; in the same period, net profit to mother increased from 0.1 billion yuan to 0.24 billion yuan, and the 3-year CAGR reached 31.8%.

In 2023, due to external changes in the industry, the company's performance revenue was under pressure. It achieved revenue of 0.31 billion yuan for the whole year, or -21.9% year on year; net profit to mother was -0.19 billion yuan, or -321.7% year over year. With 2024Q1, the company achieved revenue and net profit of 0.07 and -0.01 billion yuan. The year-on-year decline narrowed, at -11.8% and -21.2% respectively.

The company's gross margin fluctuated in the short term. As of 2022, the company's gross margin has remained at a high level of around 60%, and the net profit margin has stabilized at more than 20%. In 2023, due to this impact, the company's gross margin fell to 43.3%, and the net margin fell to -60.7%.

The scale of the satellite Internet industry continues to expand, and the market size of China's satellite Internet industry is expected to reach 44.7 billion yuan in 2025. Countries around the world are actively participating in constellation construction to seize the first-mover advantage in the satellite Internet industry. As of 2022, the total number of satellites in orbit in the world reached 6,718, of which the US accounts for 67.4% of the world and China only 596, accounting for 8.9%, forcing China's satellite industry to upgrade at an accelerated pace. The G60 Starlink was first announced on July 25 this year. The satellite factory's design capacity will reach 300 units/year, and the cost of a single star will be reduced by 35%; on August 6, the first batch of “One Arrow 18 Stars” of the Qianfan Polar Orbit 01 group of satellites was successfully launched by Gus Aerospace in Taiyuan, marking that China's satellite internet has moved from testing and verification to the batch networking stage, and commercial space and satellite internet construction is expected to accelerate.

Military spending is growing at an accelerated pace, the importance of national defense informatization is highlighted, and the field of military broadband communications has broad prospects. According to SIPRI data, in 2022, China's defense and military expenditure accounted for 13.2% of the world's total military expenditure, ranking second in the world. Compared with global military spending, China's military expenditure accounts for a lower share of GDP, and there is more room for future growth. In 2021, China's private network communication equipment market size was 20.7 billion yuan, and the private network communication service market size was 12 billion yuan. In the downstream supply chain classification of the private network communication industry, military communications account for up to 56.30% of government and public security.

The company has mastered the key technologies of broadband mobile communication, occupied a leading position in the industry, and expanded its business layout into 5G, data link, satellite broadband communication and other technical fields. The company has complete military qualifications, forming a clear competitive advantage for unqualified enterprises. The company has finalized and is developing a total investment of 0.364 billion yuan in 5G small base station equipment R&D and industrialization projects. The new model products continue to expand in many fields and industries, and have a first-mover advantage within the industry. The company's development goals are clear. As of 2023, next-generation data link products have entered the prototype selection stage and are expected to become the main equipment in the future; the satellite business already includes products such as satellite communication payloads, terrestrial communication systems, in-orbit verification platforms, etc., and many key projects will be bid in 2023. The company and Yuanxin Technology plan to trade about 0.2 billion yuan in 2024, and the future development trend is good.

Profit forecast, valuation analysis and investment suggestions: The company's 2024-2026 net profit is expected to be 0.099/0.197/0.251 billion yuan, up 151.9%/100.2%/27.1% year on year; the corresponding EPS is 0.16/0.31/0.40 yuan, and the PE corresponding to the closing price on August 22, 2024 is 89.2/44.5/35.0 times, respectively, and covered for the first time to give a “buy-B” rating.

Risk warning: risk of increased market competition; risk of fluctuating customer procurement; risk of loss of technical personnel.