Forecast profit fell 18.58% year-on-year

The company issued a pre-reduction announcement on its 2020 performance. The company estimates that (1) the operating income in 2020 will reach 954 million yuan, an increase of 5.48% over the same period last year; in the same period, the net profit of homing will reach 240 million yuan, down 18.58% from the same period last year. During the reporting period, the equity incentive cost was confirmed to be 63 million yuan, and excluding the equity incentive cost, the net profit returned to the mother was 304 million yuan, an increase of 2.85% over the same period last year. (2) in a single quarter, 4Q20 realized operating income of 329 million yuan, an increase of 11.90% over the same period last year, and net profit of 96 million yuan in the same period, down 19.32% from the same period last year. Excluding the impact of equity incentives, 4Q20's single-quarter net profit was 125 million yuan, up 5.04 per cent from a year earlier.

The results are in line with the guidance range of previous performance forecasts.

Pay attention to the main points

Revenue growth accelerates quarter by quarter, and the inflection point of front-end business demand may be coming. We believe that (1) the year-on-year growth rate of the company's Q1-Q4 revenue in 2020 is 57.82%,-21.43%, 3.27% and 11.90% respectively, and the revenue growth rate may have bottomed out.

(2) from the perspective of sub-products, the overall growth of the front-end products may be relatively limited due to the fluctuation of the downstream boom, while the back-end products continue to expand, which has become the main support for the company's overall revenue scale to remain relatively stable. (3) from the performance of the companies related to the network visualization industry chain, the operators may have taken the lead to start the collection of network visualization equipment for 5G, and the downstream prosperity may be gradually restored.

The cost of equity incentive interferes with the overall performance, and the pace of personnel expansion slows down or leads to a decline in the growth rate of expenses during the preparation period. (1) excluding the impact of equity incentive costs, we get a net profit of 304 million yuan for 2020 and 125 million yuan for 4Q20 in a single quarter, an increase of 2.85% and 5.04% respectively over the same period last year. (2) from the point of view of gross profit margin, we believe that the level of gross profit margin may decrease due to the impact of controlled upgrading at the front end.

On the other hand, the volume of back-end products may also lead to a tilt in the product structure and a slight decline in the overall gross profit margin. (3) from the perspective of expense rate, the cost of equity incentive may lead to a rapid increase in expense rate. However, taking into account the previous large personnel expansion, superimposed epidemic suppression, we believe that the company's personnel expansion in 2020 may slow down, excluding equity incentive costs, the expense rate level may decline. (4) the company's exchange loss of 19 million yuan in 2020 (exchange gain of 742300 yuan in the same period last year) also suppressed the overall profit performance to a certain extent.

5G penetration increase under the front-end demand inflection point may gradually come, optimistic about the company's long-term growth.

Valuation and suggestion

Taking into account the possible slowdown in the pace of personnel expansion, we raised the 2020 net profit by 2% to 240 million yuan, maintained the 2021 net profit forecast of 321 million yuan, and introduced the 2022 net profit forecast of 425 million yuan. Maintain the rating of the outperforming industry, but due to the downward movement of the valuation center caused by the fluctuation of the prosperity in the downstream of the industry, we lowered the target price by 24.0% to 79.00 yuan.

In terms of net profit after excluding equity incentive costs, the current share price corresponds to the 2021,22 18x/16x price-to-earnings ratio, and the target price corresponds to the 2021max 22 30x/26x price-to-earnings ratio, which has 67.8 per cent upside compared with the current share price.

Risk.

New orders fell short of expectations; systemic valuation pullback.