Incident: The company released its three-quarter report for 2024 on October 29. In the first three quarters of 2024, revenue was 9.23 billion yuan, YoY -28.7%; net profit to mother was 0.56 billion yuan, YoY +9.4%; net profit without return to mother was 0.2 billion yuan, YoY -57.5%. Revenue performance fell slightly short of market expectations. It is mainly affected by factors such as adjustments to aerospace product user settlement plans and cable asset divestment statements. Our comprehensive review is as follows:

Q3 net profit surged 151% year over year; asset slimming down profitability increased significantly. Looking at a single quarter, the company achieved revenue of 1.52 billion yuan, YoY -54.1%; net profit to mother of 0.31 billion yuan, YoY +150.9% in 3Q24.

The company's Q3 profit growth was mainly affected by investment income from the transfer of some shares in Aerospace Electric (2024Q1-3 investment income of 0.27 billion yuan, compared to 2.04 million yuan in the same period last year). In terms of profitability, 3Q24 gross margin was 39.8%, up 14.13ppt year on year; net margin was 20.6%, up 16.76ppt year on year.

The consolidated gross margin for the first three quarters of 2024 was 22.8%, up 3.11ppt year on year; net margin was 6.4%, up 2.37ppt year on year. After divesting its wire and cable assets, the company lost weight and improved its profitability significantly.

R&D investment increased; inventory increased 9% from the beginning of the year. In terms of expenses, the company's expense ratio for the first three quarters of 2024 was 19.4%, an increase of 4.50ppt over the previous year. Among them: 1) the sales expense ratio was 2.7%, up 0.42ppt year on year; 2) the management expense ratio was 9.6%, up 2.42ppt year on year; 3) R&D expenses rate 6.0%, up 1.54 ppt year on year; R&D expenses were 0.55 billion yuan, a decrease of 3.9% year on year; 4) financial cost ratio was 1.2%, up 0.12ppt year on year. As of the end of 3Q24, the company: 1) accounts receivable and notes were $8.67 billion, down 5.3% from the beginning of the year; 2) inventory was $21.3 billion, up 9.2% from the beginning of the year; 3) contract liabilities were $1.7 billion, down 37.8% from the beginning of the year; 4) net cash flow from operating activities was -3.82 billion yuan, compared to -2.07 billion yuan in the same period last year, mainly due to a decrease in cash flow received from sales of products.

Focus on the main industries of aerospace electronics and unmanned systems equipment, and seize opportunities for satellite internet and low-altitude economic development.

On August 1, 2024, the company successfully completed the registration procedure for the transfer of 51% of the shares in Aerospace Electric Company. The company will no longer share with Aerospace Electricians, and will focus on the main business of aerospace electronic information and unmanned systems equipment. In terms of satellites, the company has full support capabilities for various satellite payloads such as spectralized laser communication terminals and data distribution processors. With the accelerated launch networking of domestic constellations in '24, the company is expected to achieve accelerated development as a core satellite payload supporting enterprise. In terms of unmanned system equipment, on October 20, 2024, Shandong Province proposed a plan to build a “low-altitude sky net”, and put forward huge procurement requirements. It will purchase no less than 2,000 mainline aircraft and no less than 20,000 regional aircraft. As one of the leading drone companies under the Aerospace Science and Technology Group with deep technology and product reserves, the company may benefit deeply.

Investment advice: The company's aerospace electronics business demand is booming, and the leading position in the industry is stable. At the same time, benefiting from the development of the unmanned system equipment business and the satellite industry, combined with asset reforms to slim down the body, the company is expected to achieve better development in the future. Considering the investment benefits brought about by the divestment of part of the company's subsidiary Aerospace Electric and the impact of subsequent disaggregation, we adjusted the company's net profit from 2024 to 2026 to 0.799 billion, 0.726 billion, and 0.896 billion yuan. The current stock price corresponds to 2024-2026 PE at 36x/40x/33x, maintaining the “recommended” rating.

Risk warning: downstream demand falls short of expectations; risk of product price fluctuations, etc.