The core supporting unit in Yuanhuo's industrial chain has obvious competitive advantages. The company's dual-use products business is mainly “navigation control and ammunition information technology”, covering products and technologies such as guidance control, navigation control, detection control, environmental control, stability control, radio and satellite communications, electrical connectors, and unmanned cruising. By continuously improving digital R&D, digital manufacturing, and digital operation capabilities, the company continues to improve quality control capabilities, build and continuously improve the “8+3” technology system and industrial ecology characteristic of northern navigation, continuously improving its core competitiveness, and is in a leading position in the industry in related fields.

Results were under pressure in the short term, turning losses into profits in the third quarter or indicating that an inflection point had been reached. The company maintains strong profitability, with a net profit CAGR of 44% from 2019 to 2023. Affected by weak overall demand in the industry in 2024, losses of varying degrees occurred in the first two quarters. In the third quarter, the company turned a loss into profit and realized net profit of 0.4659 million yuan to mother. Although there was still a lot of pressure on the company's performance during the year, the 2024Q3 performance turned a loss into a profit or indicates that the industry's demand inflection point has reached. The overall procurement volume may exceed expectations after the subsequent expansion of the Yuanfire Spectrum, and the company is expected to benefit deeply by relying on the arms group's endorsement advantage.

Yuanhuo domestic demand foreign trade two-wheel drive, and industry demand continues to expand. The long-range fire is a low-cost core equipment for accurate guidance, and is known as a “powerful tool to change the course of war” in the Russian-Ukrainian conflict. The US long-range guided rocket (GMLRS) procurement costs from 2010 to 2022 accounted for about 70% of the total procurement of precision missile medicine (PGM) by the US Army. Based on many war experiences and predictions of the world situation, the United States has been purchasing GMLRS in large quantities since 2018. Domestic long-range fire has strategic reserves and actual combat training consumption requirements; external global military spending has entered a period of high growth. China has excellent long-range performance and few additional conditions, and it is expected that it will continue to explore the military trade market. Yuanhuo is driven by both domestic demand and foreign trade, and industry demand is expected to continue to expand. As a core supporter of Yuanhuo's industrial chain, the company is expected to benefit.

Digital intelligence manufacturing capacity continues to improve, and profitability continues to improve. The company's digital construction is progressing steadily, creating an intelligent and flexible manufacturing platform to reduce costs and increase efficiency, and achieve full coverage of the entire spectrum of intelligent assembly capabilities for the batch production guidance series in 2022. In 2023, the company completed the construction of a logistics control system and an assembly unit to supplement and upgrade inspection testing and processing capabilities; completed xx series comprehensive laboratory transformation, cruise series research and production capacity improvement, and completed the phased construction of automated intelligent inspection lines and composite inspection units. The results of the intelligent production line were remarkable. The gross margin of 24H1 company reached 40.09%, an increase of 15.29pct over the full year of 23.

Profit forecast and investment advice: The company is expected to achieve operating income of 1.78, 6.398, and 8.637 billion yuan in 2024-2026, and achieve net profit of 0.105, 0.301, and 0.453 billion yuan. The corresponding PE for 25-26 is 54.39 and 36.07 times, maintaining the company's “recommended” rating.

Risk warning: Order placement falls short of expectations; the pace of military product confirmation falls short of expectations; risk of military price reduction; new product development falls short of expectations