Missile power and ammunition are the two main lines, and barriers are growing and speeding up. Guoke Military focuses on missile (rocket) solid engine power and control products and ammunition equipment, and relies on five subsidiaries to carry out actual business. Among them, Aerospace Jingwei is committed to solid engine power module business, Yichun Pioneer and Jiujiang Guoke are assembly plants for ammunition equipment, Spark Military is responsible for fuze and intelligent control equipment, and Xinming Machinery is developing fuze and intelligent control equipment and missile safety and control module business. Relying on the core technical advantages of high R&D investment, the company continued to increase the number of standard product and model development tasks. 2022/2023/2024Q1-3 achieved operating income of 0.837/1.04/0.764 billion yuan, +24.50%/+12.70% year-on-year, and achieved net profit of 0.111/0.141/0.149 billion yuan, respectively, +46.55%/+27.34%/+61.20% year-on-year.

Announcing capacity expansion and housing construction projects, solid state engine business progress accelerated. In the field of solid engine power and control, the company has undertaken many solid engine charge development and mass production tasks such as Yx series and Px series missiles, as well as military and trade C series and WS series rockets. In particular, high fuel speed power module products are widely used due to their excellent performance. Furthermore, the company's next-generation high-energy insensitive propellants and castable butadiene hydroxide liners have made breakthroughs and applied to a new generation of key models. On August 1, 2023, the company announced that it plans to invest 0.65 billion yuan to expand the production capacity of solid engine power modules; on July 31, 2024, the company announced that it plans to invest 0.343 billion yuan in aerospace power research and development centers and supporting shell capacity building to transform into the aerospace engine assembly field. We believe that the company can effectively improve production capacity bottlenecks through capacity expansion and shell construction projects, and the solid engine business will grow rapidly in the future.

Mainly used ammunition is the core general factory, and new models are continuously being developed. The company's ammunition field mainly includes primary ammunition, special ammunition and fuses and intelligent control products. Among them, DJ022/JK ammunition and DJ014/XF ammunition, the main source of revenue for the company's main ammunition products, is the main source of revenue for the company's main ammunition products. With long-term deep cultivation and accumulation, the company has become the only enterprise other than the military central enterprise group with scientific research and production capabilities for various types of medium and small caliber ammunition. In terms of small-caliber anti-missile ammunition, many key technologies and products are at the leading level in the industry. They have continuously won bids in the “scientific research merit competition” process for military product upgrades; they also successfully bid through DT033/JK medium caliber ammunition, marking the company's opening up a new situation in expanding the medium caliber ammunition business. Furthermore, in the field of fuses and intelligent control products, the company is one of the main suppliers of ammunition fuses for certain weapon systems. At the same time, it has developed products such as a new type of ammunition intelligent fuse for certain main combat equipment around the direction of intelligent ammunition.

The equity incentive plan was announced, and the company's management is full of momentum. On July 31, 2024, the company announced the draft restricted stock incentive plan. A total of 200 people (23.26% of the company's total number of employees) were awarded for 3.6 million shares (2.05% of the total share capital), and the grant price was 21.13 yuan/share. The assessment period is 2025-2027. We believe that this equity incentive will fully mobilize the enthusiasm of the company's employees and reflect the management's determination for the future development of the company.

Profit forecasting and investment ratings. We expect the 2024-2026 EPS to be 1.05/1.22/1.65 yuan. Combined with the PE valuation situation of comparable companies, the company will be given a PE valuation of 60-65 times in 2024, with a corresponding reasonable value range of 63.30-68.57 yuan. For the first time, we covered it and gave it a “superior to the market” rating.

Risk warning. Due to the volatility of military orders, the progress of the capacity expansion project fell short of expectations.