The company is a major domestic supplier of electromagnetic functional materials and structures. The products cover a full range of stealth functional coating materials, stealth functional structural parts, electromagnetic compatible materials for civilian products, etc. Relying on a strong talent team and first-mover advantage, the company supplies materials and structural parts for card slots, and strong competitiveness creates a high moat. It is expected that in the future, as stealth equipment is deployed, it will maintain a relatively rapid growth rate, and civilian products will also have room for development.

The 24-year growth rate is expected to grow steadily, with sufficient orders from major customers. The company is a well-known supplier of electromagnetic functional materials and structures in China. Its main products include stealth functional coating materials, stealth functional structural parts, and electromagnetic compatibility materials. The company's products are mainly military, accounting for more than 97% of revenue in 2023, mainly used in the stealth field; supplemented by civilian products, it is mainly used in the field of electromagnetic compatibility.

Revenue side: The company's revenue showed rapid growth in 2019-2023, and is expected to grow steadily in 24 years.

CAGR reached 58.66% in 2019-2023, mainly due to the rapid growth of the company's stealth functional coating materials and stealth functional structural parts business; 2024Q3, the company achieved revenue of 0.589 billion, compared with -16.86%, mainly due to high growth in the previous period, leading to a high base; and stealth functional structural parts were reduced due to product iterations for some important customers. The company expects to achieve revenue of 1.02-1.15 billion in 2012, +3.99%-17.25% year-on-year.

Profit side: Net profit to mother also showed a high growth rate in the previous period, and is expected to grow steadily in 24 years. The company's net profit to mother increased rapidly from 2019 to 2023. The CAGR reached 65.86%, and the profit side growth rate was higher than the revenue growth rate. The lower profit side growth rate in '21 was mainly due to an increase in share payment fees (148.3386 million yuan). With 2024Q3, the company achieved net profit of 0.32 billion yuan, -17.31% year-on-year. According to the company's prospectus, the company expects to achieve net profit of 0.572-0.655 billion in 2024, +1.47%-16.20% year-on-year.

Order side: Major customers have sufficient orders in hand. As of January 31, 2024, the company's on-hand contract balance for the aviation industry was 0.898 billion yuan, and the on-hand order amount (excluding tax) for China Telecom was 93.4661 million yuan. The on-hand order situation was good.

There is a large gap in the application of stealth technology in China, and there is room for expansion with other equipment. Stealth performance is the most important characteristic and key ability of high-tech weapons and equipment such as new fighter jets. With its stealth characteristics, it can have an overwhelming tactical advantage over non-stealth fighters.

Stealth fighter space: Compared with the US, China has a huge gap in the number of stealth fighter jets, and the future space is vast. According to “World Air Forces 2023” statistics, the number of the two types of stealth fighter jets currently in service in the US military has reached 649, and the number of future orders will reach 2,596. This number is higher than the number of stealth fighter jets in China. The gap is huge, and there is plenty of room for future deployment.

Post-maintenance market: Stealth materials have poor application environment, consumable properties, and broad market space after maintenance. According to reports from overseas networks, it costs nearly one million dollars to replace the stealth coating each time. Loma said at the Korea International Aviation and Defense Exhibition (ADEX) in October 2019 that the maintenance interval for the F-35 low observable coating is now 19 hours. If calculated based on the expected life expectancy of a single F-35 of 8,000 hours, the service cycle of a single F-35 will require about 421 repairs, leading to a market size of over trillion US dollars after maintenance.

Other equipment expansion: Stealth functional materials have more room for expansion in missiles, drones, ships, etc.

The company's stealth materials have strong core competitiveness and a stable competitive pattern. The company mainly provides stealth functional coating materials and stealth functional structural components in the industrial chain. The pace and sequence of its delivery:

Stealth coating materials: The stealth coating process is generally at the end of machine manufacturing and is relatively consistent with the aircraft delivery pace.

Stealth functional structural parts: Compared with the pace of aircraft delivery, there is a certain advance preparation and procurement cycle.

The industry has high barriers: high barriers to product development, barriers to entry into the industry, and high barriers to talent teams.

The company's competitive advantages: R&D capability advantage, talent team advantage, first-mover advantage, technical advantage, etc. Competitive landscape: Product model requirements are highly customized, competitors are scarce, and focus on different segments. EMMS products are highly customized according to downstream application model requirements. The product applications in the industry are widely distributed. The same industry units all focus on different segments. Competitors are scarce, and the pattern is stable? The company actively expands the civilian product business, and relies on electromagnetic compatibility products to expand a broad space. The company's electromagnetic compatibility materials are materials with electromagnetic wave absorption functions, which can effectively solve electromagnetic interference within and between devices. They are mainly used in consumer electronics, communication equipment, etc. In the future, as integrated electromagnetic compatibility problems become more prominent, the emerging field of automotive electronics develops rapidly, and the international market is expected to open up further. In the first half of 2021-2024, the company's revenue from electromagnetic compatibility materials was 28.9652 million yuan, 22.4546 million yuan, 28.3451 million yuan and 9.5769 million yuan respectively, accounting for 5.46%, 2.92%, 2.89% and 2.60% of the main business revenue, respectively. The company is actively expanding sales of existing businesses such as rubber sheets and microwave load absorbing materials, and is actively investing in incremental businesses such as microwave anechoic chambers and EMC darkrooms. Microwave anechoic chambers have completed research and development of related products and formed a small number of orders.

Raise capital to expand production, build R&D centers, and support future development. The company issued 40.01 million shares in this IPO, with a net amount of 1.003 billion dollars after deducting the issuance costs borne by the company. The total amount raised will be invested in the construction of the “Electromagnetic Functional Materials and Structure Manufacturing Base Construction Project” and the “Electromagnetic Functional Materials and Structure R&D Center Construction Project”. The construction period is 2 years. After the implementation of the project, the company will 1) relieve the pressure of insufficient production capacity and help scale up the stealth functional structural parts business. 2) Improve the quality of the company's products and enhance the company's overall competitiveness. 3) Improving the company's R&D environment and expanding talent strength will help the company maintain and expand its technological leadership. We expect the company's 2024/2025/2026 revenue to be 1.09, 1.264, and 1.463 billion yuan, respectively, and net profit to mother of 0.627 billion yuan, 0.736 billion yuan, and 850 million yuan, respectively. We recommend focusing on it after listing.

Risk warning: risk of fluctuations in military orders, risk of fluctuations in raw material prices, etc.