Event: the company released the 2020 annual report, with an annual operating income of 21 billion yuan, a decrease of 14.55% over the same period last year, and a net profit of 102 million yuan belonging to the parent company, a decrease of 89.55% over the same period last year.

Q4 performance declined significantly, sending out the upward trend of commodity return. The company is located in the epidemic area of Wuhan. Q1 is affected by the epidemic, and its income and performance have declined seriously. With the easing of the domestic epidemic in March, the bidding of operators has been launched one after another, and the performance of the company's Q2 and Q3 continues to recover. However, the company's Q4 revenue declined significantly compared with the same period last year, with a net profit loss of 175 million yuan per quarter, resulting in a net profit of only 100 million yuan for the whole year. The net operating cash flow for the whole year was 112 million yuan, down 68 percent from the same period last year. The advance payment + contract liability was 3.6 billion yuan, an increase of 470 million yuan over the same period last year. Issued a book balance of 7.4 billion yuan, returning to the upward trend.

Communication system business is expected to pick up. In 2020, the company's communications system revenue was 12.9 billion yuan, down 16% from the same period last year, and the gross profit margin increased slightly. Looking ahead, we expect the business to pick up in the future as the proportion of operators' wired-side and 5G carrier network capital expenditure increases, but considering that long-term operator capital expenditure may enter a downward cycle, the long-term growth of the business may slow.

The optical fiber and cable business is in the doldrums. In recent years, the optical fiber and cable industry has been affected by oversupply and depressed demand, and its price is at a low level. The company's 20-year revenue of optical fiber, cable and cable business was 5.2 billion yuan, down 5% from the same period last year, the gross profit margin declined slightly, and the net profit of the beacon rattan warehouse, which is mainly engaged in light rods, further decreased.

Beacon flames and starry sky performance release is lower than expected. The subsidiary company made a net profit of 66.16 million yuan in the past 20 years, compared with 120 million in the first half of the year, making a loss in the second half of the year for the first time. We believe that although affected by the epidemic in 20 years, the prosperity of the public security network security field has not become a prosperous year, but the company orders in the industry are basically stable compared with the same period in the past 19 years. In addition, taking into account seasonal factors, the second half of the year is the peak season of the industry, losses are rare. Therefore, with reference to the situation of the industry, we speculate that the proportion of orders confirmed by Star in hand is relatively low.

Looking forward to the 21st year, due to the early stage of the 14th five-year Plan, there is still uncertainty in the demand for prosperity in public security and other fields. It is expected that by the end of the 21st year, the overall investment plan for network security during the 14th five-year Plan period will be launched, and 22 years is expected to enter a new round of orders and construction business cycle.

Downgrade "overweight" rating: taking into account the uncertainty of the impact of Sino-US trade frictions on the supply chain, the 21-22 net profit will be reduced from 15 to 4.9 (- 65) / 6.4 (- 57) billion yuan in 21-22, and the 23-year net profit is forecast to be 780 million yuan. Corresponding to PE 43X/33X/27X, if the conversion factor is taken into account, the PE 49X/38X/31X after conversion will be reduced, taking into account the weakening of the company's main business growth and increased performance instability. Downgrade to "overweight" rating.

Risk hints: the persistence of independent networking investment is lower than expected; the competition in the network security market is intensified; the release of corporate performance is lower than expected, and the weakening growth leads to the downward movement of the long-term valuation center.