Incidents:

The company announced its 2024 semi-annual results report. According to the company announcement, in 2024H1, the company achieved revenue of 1.303 billion yuan (yoy -32.21%), realized net profit due to mother 0.245 billion yuan (yoy -20.77%), and realized net profit of 0.238 billion yuan (yoy -16.75%) after deducting non-return to mother. Q2 2024 achieved revenue of 0.609 billion yuan (yoy -50.21%) and net profit to mother of 0.124 billion yuan (yoy -35.79%). 2024Q2's performance fell short of market expectations.

Comment:

The slowdown in downstream orders affects the main business, and revenue is expected to rise steadily throughout the year. According to the company announcement, 2024H1's revenue declined year over year. According to our analysis, 1) By product, 2024H1's T/R components and RF modules achieved revenue of 1.169 billion yuan (yoy -36.50%), RF chips achieved revenue of 0.088 billion yuan (yoy +35.68%), and the pace of orders in the downstream defense sector slowed down, leading to a year-on-year decline in T/R component and RF module business revenue. 2) On a quarterly basis, Q2 2024 achieved revenue of 0.609 billion yuan, a year-on-year decrease of 50.21% and a year-on-month decrease of 12.09%. We expect that as the pace of downstream orders recovers, demand for military products will continue to rise, and the civilian market will expand at an accelerated pace. The company's revenue is expected to rise steadily throughout 2024.

Profitability continues to improve, which is expected to drive a return to growth in performance. According to the company announcement, the company's 2024H1 gross margin was 35.14%, up 3.58 pcts from the same period last year, and the net margin was 18.77%, up 2.71 pcts from the same period last year. According to our analysis, 1) The company's gross margin has shown a continuous upward trend since it bottomed out in 2022/Q4, mainly due to the gradual release of production capacity and the continuous increase in superimposed scale effects, and it is expected that the upward trend will continue in the future. 2) The increase in the company's net interest rate is mainly due to cost reduction and efficiency, and the continuous deepening of the profitability of superimposed products. We expect that as the scale effect of the company continues to increase, the company's profitability is expected to continue to increase. Combined with the recovery in the revenue scale of the company's main business, performance is expected to resume growth.

The number of projects under construction continues to increase, and the production capacity advantage is expected to continue to expand. According to the company's announcement, as of the end of 2024Q2, the company's projects under construction were 0.29 billion yuan, an increase of 63.84% over the beginning of the year, mainly due to continued investment in RF chip and component industrialization projects.

With the completion and commissioning of the first phase of the company's project, the production capacity of the main products has further increased, while the capacity for millimeter wave and terahertz T/R component design and mass production testing of microwave millimeter wave chips has increased, and the company's revenue volume is expected to grow steadily along with the recovery of industry sentiment.

Backed by CLP 55, the military and civilian sectors have driven steady growth in performance. 1) The company is backed by CLP 55 and is a core domestic RF and T/R component enterprise with a deep technical background; 2) The company's military and civilian dual-line layout, the military T/R component business is expected to benefit from increased penetration rate of phased array radars, and the civilian RF business is expected to grow rapidly with 5G base station construction and demand for RF modules in mobile phone terminals; 3) The company has formed an industrial chain layout from chips to modules and components. The future will fully benefit from the release of external demand, and the company's performance is expected to grow rapidly.

The 2024-2026E profit forecast was lowered and the “Overweight” rating was maintained. Considering the impact of fluctuations in downstream demand, the T/R component and RF module business, which accounts for more revenue, declined significantly, so we lowered our 2024-2026E net profit forecast to 0.59/0.739/0.942 billion yuan (previous value was 0.707/0.869/1.106 billion yuan). The current stock price corresponds to PE 38/30/24 times, respectively. Comparing representative companies with RF-related products such as Zhenlei Technology (RF chips), Chengchang Technology (T/R chips), and Zhuo Shengwei (RF devices/modules), etc., the average PE value of the company in 2024 was 46 times, and the company's 2024E PE valuation was lower than the industry average. Considering that the company is a leading RF and T/R component company, the core benefits from increased demand from the military and civilian markets, and the continuous increase in combined profitability, it maintains an “increase” rating.

Risk warning: risk of changes in product sales prices; risk of changes in military order demand; increased risk of industry competition.