Incident: The company announced on October 25 that the company's revenue for the first three quarters of 2024 (0.209 billion yuan, -47.71%), net profit attributable to mother (-0.009 billion yuan, -114.85%), net profit margin (-0.014 billion yuan, -147.36%), gross profit margin (49.74%, +4.57pcts), net profit margin (-4.39%, -19.84pcts). 24Q3 achieved revenue (0.049 billion yuan, -47.40% YoY, -55.47%), net profit to mother (-0.011 billion yuan, -150.68% YoY, -184.70% month-on-month), gross profit margin (48.89%, YoY +2.40pcts, -2.62pcts month-on-month), net profit margin (-22.08%, YoY -44.99pcts, month-on-month -33.68pcts).

Embedded computer supplier for equipment platforms in various key areas

The company mainly targets customers in key national areas and provides customized embedded modules and solutions.

The products cover technical directions such as signal acquisition, image sensing and intelligent processing, intelligent computing terminals, bus control, edge storage, and high-reliability intelligent power supplies. The products have been successfully applied to equipment platforms in various key fields such as airborne, missile, space, drones, and commercial aerospace. The results of the three-quarter report were under pressure. The bottom reversal expectations strengthened in the first three quarters of 2024. The company's revenue (0.209 billion yuan, -47.71%) and net profit to mother (-0.014 billion yuan, -147.36%) declined sharply, mainly due to the industry environment, delays in some orders, which led to a decrease in delivery. At the same time, the company transferred shares in some participating companies during the same period last year, increasing investment income, leading to a year-on-year decline in investment income. The gross profit margin (49.74%, +4.57pcts) increased slightly, which we believe is mainly due to the company's product restructuring and material cost changes. The net interest rate (-4.39%, -19.84pcts) declined sharply, and we think it was mainly due to an increase in the three-rate rate (23.97%, +9.88pets) due to a decrease in revenue scale. It is worth noting that the company's 2024 interim report revealed a significant increase in new R&D projects (120, +17.65%), laying a good foundation for the company's future batch production and revenue growth. At the same time, with the arrival of the end of the “14th Five-Year Plan”, military recovery expectations continue to increase, and the company's fundamentals are expected to rebound, driving a reversal in performance.

Expense rates remain high, and revenue recovery is expected to eliminate the impact

On the cost side, the company's three-rate rate (23.97%, +9.88pcts) increased dramatically, and the management rate (13.07%, +5.61pcts) and R&D expenses (37.06%, +14.99pcts) all increased significantly, mainly due to the decline in the company's revenue scale. At the same time, the financial expense ratio (1.18%, +0.71 pcts) increased slightly, mainly due to the company's business development needs, the average loan balance increased compared to the same period last year, and interest expenses increased. The company's sales expenses (0.02 billion yuan, -17.46%) have declined, mainly due to a decline in the company's revenue and a decrease in accrued after-sales service fees.

Operating cash flow improved dramatically, and inventory was gradually cleared

Net operating cash flow ($0.031 billion, +143.12%) improved significantly, which we believe was mainly due to an increase in maturing and accepting notes receivable during the reporting period compared to the same period last year. In terms of other financial data, at the end of the reporting period, the company's inventory (0.315 billion yuan, -10.77% 6) declined significantly, with a significant increase in product value. We believe that it is mainly because the company mainly uses sales and production methods to organize production and procurement and has taken full inventory. The company has a clear grasp of downstream market demand and is gradually clearing inventory. Accounts receivable (0.72 billion yuan, -0.79%) remain stable. We believe that accounts receivable are manageable to the company's overall financial pressure, and that the company is receivable from units affiliated with major national key area groups. Customers have good credit, and the probability of bad debts is small.

All fund-raising projects have been completed, and the embedded computer expansion project has reached a usable state. On September 30, 2024, the company announced that the fund-raising investment project “Embedded Computer Power Expansion Project” had reached the intended state of use and was put into use. According to the project description, the company's embedded computer production expansion project is expected to increase annual net profit by 0.077 billion yuan. Furthermore, the R&D center technology transformation project in the company's fund-raising project will further enhance the company's ability to innovate independently and enhance the company's core competitiveness. The company's fund-raising projects have laid down production and R&D conditions for future medium- to long-term development, which is conducive to enhancing the company's overall competitiveness, sustainable profitability and resilience to risks, and building an important foundation for the company to achieve steady revenue growth in the next few years.

Focus on in-depth customer cooperation and expand the range of cooperative products

After more than 20 years of industry technology and experience, the company has rich design, technical reserves, research and implementation experience in localization, wide temperature operation, vibration resistance, low power consumption, and miniaturization of embedded computers. Participating models have more and more diverse products, and there are more and more participating subsystems. The company has strengthened horizontal cooperation with different customers and different extension systems of key models. The number of cooperating units and projects of the same model has increased markedly, the quality of projects has improved, and the value of individual projects has increased. Currently, key models and key subsystem units are participating. The company plans and lays out ahead of time around key units, increases investment from key customers, and increases the company's market share.

Investment advice

We believe that the number of the company's research projects and on-hand orders is impressive, and the overall downstream market prospects are broad. The specific views are as follows:

1. Promoting military informatization and achieving autonomous control of weapons and equipment is a key direction of China's national defense construction, and embedded computers, as the foundation of intelligence, informatization and modernization in weapons and equipment, will benefit from industry development;

2. The initial public offering of shares has all been completed, and the embedded computer capacity expansion project has reached a usable state, laying the production and R&D conditions for future medium- to long-term development, which is conducive to enhancing the company's overall competitiveness, sustainable profitability and resilience to risks; 3. The company has a considerable number of research projects and ongoing orders, stable industry position, full demand in the overall downstream supporting market, and the number of R&D personnel is growing rapidly. The company is actively expanding the downstream application field of products, which is expected to raise the market ceiling corresponding to the company's business; 4. The company belongs to the military electronics sector and is in the upper reaches of the military industry chain, in the market In the face of warming, increased liquidity, and increased investment risk appetite, it is expected to take the lead in drastic improvements in fundamentals as the industry recovers, valuation digests, and inventory clean-up, thus opening up space for a double hit in performance and valuation.

Based on the above view, we predict that the company's net profit for 2024, 2025, and 2026 will be 0.081 billion yuan, 0.113 billion yuan, 0.159 billion yuan, and EPS of 0.72 yuan, 1.01 yuan, and 1.42 yuan, respectively. We maintain a “buy” rating, with a target price of 40 yuan, corresponding to 55.56 times, 39.60 times and 28.17 times PE of the EPS forecast for 2024-2026.

Risk warning

Macroeconomic policy changes, technology research and development falling short of expectations, risk of fluctuations in raw material prices, and risk of exchange rate fluctuations.