Incident: The company announced its 2020 annual report and 2021 quarterly report, in line with our expectations.
1. The net operating cash flow in the annual report was the highest in history, and the statement side already showed significant marginal changes. The balance sheet is clean and sound: According to the company's annual report, total assets are 6.48 billion yuan, total liabilities are 1,763 billion yuan, and the balance ratio is 27.20%. Among them: 1) The debt side is mainly current liabilities (1,733 billion yuan, accounting for 98.30% of total debt), of which notes payable and accounts payable totaled 1,231 million yuan, accounting for 71.03%, which shows that the company has a certain voice in the upstream and downstream of the industrial chain; advance payments were 314 million, an increase of 265.12% over 2019's Q1, reflecting the popularity of the company's Q1 orders and operations. 2) On the asset side, mainly current assets (4,547 billion yuan, accounting for 70.17% of total assets), of which monetary capital was 1,985 billion yuan, accounting for 43.66%; notes receivable and accounts receivable were 1,746 billion yuan, accounting for 38.40%. Considering that the company's downstream is dominated by government customers and large industrial and commercial customers, the risk of accounts receivable forming bad debts is low. Overall, the company's balance sheet is very clean and sound. Net operating cash flow was the highest in history: According to the company's annual report, net operating cash flow in 2020 was 628 million yuan, an increase of 741.86% over the previous year, the highest in history, mainly due to the company's strengthened project quality screening and sales payback management. At the same time, according to the company's 2021 quarterly report, the amount of cash purchased for goods and received for labor was 822 million yuan, an increase of 66.40% compared to 2019. It also verifies from another perspective that the company's Q1 orders and business conditions mentioned earlier are booming, laying a certain foundation for growth throughout the year. Continued increase in R&D investment: the company invested 297 million yuan in R&D in 2020, accounting for 12.47% of revenue, an increase of 0.74 percentage points compared to 2019; judging from the 2021 quarterly report, the company's R&D expenses for the first quarter alone were 90 million yuan, an increase of 21.62% over 2020q1, and the company continued to increase R&D investment.
In summary, the performance of the company's annual report and quarterly report is in line with expectations. Judging from the report side, marginal changes are remarkable: 1) the balance sheet is healthy and stable; 2) the net operating cash flow is the best in history. What underlines the company's quality requirements for early projects and management of post-sales repayment are constantly improving; 3) the scale of advance payments and cash outflows is expanding rapidly, which means that this year's Q1 orders and operating conditions are optimistic, laying a good foundation for annual performance growth; 4) R&D expenses continue to increase to ensure that the company's core competitiveness for long-term development continues to strengthen.
2. The 10-year long-term restricted stock incentives were implemented, and the governance structure also showed significant marginal changes.
It is necessary to understand this equity incentive from a strategic point of view. It shows that in the context of the “Three-Year Action Plan for State-owned Enterprise Reform (2020 to 2022)”, China Network Security and China Telecom Group have bound the company's core management and technical team internally through a long-term incentive mechanism; sending positive signals to the outside world to reshape the company's image in the industry and capital markets; on the other hand, the implementation of the three-year action plan for state-owned enterprise reform, improving the modern enterprise system with Chinese characteristics, and forming a scientific and effective corporate governance mechanism; the equity incentives for the next 10 years (in 5 batches) have basically locked in the company's business performance growth targets for the next 5-10 years.
Profit forecast and investment rating: According to the order data announced by the company, we raised the company's 2021-2022 EPS from 0.25/0.30 to 0.26/0.36 yuan. We expect EPS in 2023 to be 0.47 yuan, and PE 68, 50, and 38 times respectively, maintaining the “buy” rating.
Risk warning: Increased competition in the industry has led to a decline in product gross margin, commercial secret promotion falling short of expectations, etc.