Key investment points:
incident. The company released its 2018 performance forecast. Net profit attributable to shareholders of listed companies was 108 million yuan to 129 million yuan, up 0.21%-19.69% from the same period last year. The company expects the impact of non-recurring profit and loss on net profit for the reporting period to amount to 26 million yuan.
Net profit for the whole year is expected to reach the predicted upper limit. Affected by positive factors such as active military and official markets, and the release of production capacity for the company's fund-raising projects, the company's main product order volume and production and sales volume are at a high level. Judging from the quarterly data for the third quarter of 2018, the company's revenue increased by 44.39% year on year. We judge that the high growth in the third quarter was due to new orders, and net profit for the whole year is expected to reach the central level of the forecast.
New products for both military and civilian use open up room for growth. The company's “Ship Power Field Comprehensive Protection System” won a gold medal in the Technology Innovation Group in the final of the 3rd China Dual-Use Technology Innovation and Application Competition. This project has won 5 national defense invention patents and the first prize of Jiangsu Province's outstanding civil-military integration project. By reducing the intensity of the ship's electrostatic field and axial frequency electric field, ship electric field protection solves the problem of stealth in the ship's electric field and enhances the ship's vitality and combat effectiveness; evaluating the ship, ship power field, and anti-corrosion level can not only provide decisions for stealth, but also accurately control anti-corrosion, thereby extending the life of the ship. We believe that the technical performance of the company's comprehensive protection system for both military and civilian ships has been recognized, and is expected to become a new growth point in the future.
There is still room for growth in the ship support industry. According to the company's 2018 semi-annual report, in 2016, the Ministry of Industry and Information Technology issued the “Ship Supporting Industry Capacity Enhancement Action Plan (2016-2020)” to encourage enterprises to improve the supporting capacity and level of marine equipment and increase the loading rate of localized marine equipment in China. By 2020, the average loading rate of localized marine equipment for the three main ship types of bulk carriers, tankers, and container ships will reach more than 80%, the average loading rate of localized marine equipment for high-tech ships will reach more than 60%, and the local support rate for key components of marine equipment will reach 80%, making it a major marine equipment manufacturer in the world. Domestic demand for military ships and official law enforcement vessels is stable. With the development of China's economy, the development of overseas investment and trade, and the introduction of the National Maritime Power Strategy, the transformation of military strategy to “offshore defense, offshore protection” has accelerated, the number of large ships in service has increased, and the demand for military auxiliary ships has also increased markedly. At the same time, a number of ships built in the 90s of the last century have also reached the renewal period. China's official law enforcement ship market is currently basically in the stage of being upgraded one after another, and there is a clear trend of large-scale expansion. Various coastal cities are also being equipped with maritime surveillance ships, patrol boats, etc., and will usher in a decade of rapid development. Special ships will form a new growth point. As the country attaches importance to the blue economy and the advancement of the “Belt and Road” strategy, marine research work continues to advance. Marine research institutions and colleges specializing in marine research have also put forward high requirements for special ships such as marine resource surveys and marine exploration, and demand is rising rapidly. We believe that the company still has room for growth in the future, and the industry is booming.
The implementation of equity incentives shows confidence in the company's future development. In September 2018, the company completed the grant of equity incentives. According to the incentive draft, using the 2017 net profit as the benchmark, the net profit achieved in 2018-2020 after deduction of stock payment expenses increased by no less than 15%, 25%, and 35%, respectively, compared to 2017. In other words, the corresponding unlocking conditions are that the net profit achieved in 2018-2020 after deduction of share payment fees is not less than 124 million yuan, 135 million yuan, and 145 million yuan, respectively. We believe that the completion of the grant of equity incentives will effectively stimulate management and facilitate the long-term development of the company.
Profit forecasts and investment advice. The company's 2018-2020 EPS is estimated to be 0.70, 0.91, and 1.15 yuan respectively. Based on the valuation situation of comparable companies, we gave the company 30-35 times PE in 2018, with a reasonable value range of 21.00-24.50 yuan, a “superior to the market” rating.
Risk warning. (1) Military orders fluctuated, and (2) new product development fell short of expectations.
