FY20 and 1Q21 results are in line with the performance report and our expectations

Sino-Singapore Syke released its 2020 annual report and 2021 quarterly report. (1) The company's revenue in 2020 reached 954 million yuan, an increase of 5.48% over the previous year; Guimu's net profit was 248 million yuan, down 16.04% year on year, which is basically in line with our expectations. (2) On a quarterly basis, the company achieved revenue of 329 million yuan in 4Q20, an increase of 11.89% over the previous year, and Guimu's net profit of 104 million yuan, a year-on-year decrease of 12.44%; 1Q21 achieved revenue of 186 million yuan, an increase of 21.27% over the previous year, and Guimu's net profit was 102 million yuan, a decrease of 61.40% over the previous year. It's basically what we expected.

Development trends

Revenue growth leveled off in 2020 due to the pandemic, but the future can be expected. (1) By product, broadband network products fell 17.34% year on year to 471 million yuan in 2020, mobile network products increased 5.90% year on year to 159 million yuan, network content security products increased 15.10% year on year to 1,084 million yuan, and big data operating products increased 197.18% year on year to 95 million yuan. (2) By industry, the revenue of the downstream government industry increased 36.09% year on year to 697 million yuan, accounting for a year-on-year increase of 16.43 ppt to 73.03% year on year, the operator industry fell 40.73% year on year to 226 million yuan, and the revenue ratio decreased 18.46ppt to 23.67% year on year. Affected by the pandemic in 2020, the government and operators' capital and budgets were invested more in epidemic prevention and control and people's livelihood security, so the expansion and construction progress in 5G construction and network visualization was suspended. However, we can already see a gradual recovery in 4Q20 and 1Q21. We believe that the company's back-end products are growing rapidly. As the epidemic improves or improves, the performance of front-end products in 2021 is worth looking forward to.

The profit side declined slightly, mainly due to increased costs brought about by equity incentives. (1) Looking at the gross margin level, the company's gross margin fell 6.2 ppt to 75.3% year-on-year in 2020, mainly due to increased sales of supporting products with low gross margins in some projects. (2) Looking at the cost side, the company's sales/management/R&D expenses ratio in 2020 was 19.3%/8.0%/24.8% respectively, an increase of 0.4ppt/1.0ppt/0.8ppt over the previous year, mainly due to increased expenses brought about by equity incentive costs. We believe that with the continuous optimization and upgrading of the company's front-end and back-end product structures and the dissipation of the impact of equity incentive costs in the future, the profit side may return to normal levels.

1Q21 operating income improved year on year, and it will still take time for profit side to stabilize. Since the company's downstream customers mainly come from operators and the government, such customers usually concentrate on bidding work in the second half of the year, causing the company's revenue to show a certain seasonality. Furthermore, the costs brought about by equity incentives still have an impact on the 1Q21 cost side. It will take time for profits to grow.

Profit forecasting and valuation

Keep earnings forecasts unchanged for 2021 and 2022. The current stock price corresponds to a price-earnings ratio of 21.9 times/16.7 times 2021/2022. Maintain an outperforming industry rating. Since we believe that it will still take time for the company's profit side to stabilize, the target price was lowered by 32.9% to 53.0 yuan, which corresponds to the price-earnings ratio of 28.7/21.9 times in 2021/2022, and there is room for 31% upward from the current stock price.

risks

Back-end product growth falls short of expectations; systematic valuation pullback