1Q21 performance is in line with our expectations

The company announced its results for the first quarter of 2021, with a total operating income of 186 million yuan, an increase of 13.78% over the same period last year, and a net profit of 8.971 million yuan, a year-on-year loss of 48 million yuan.

Core equipment main business steady development, subsidiaries Haiwei Huaxin and Ansheng drag down profits. 1) the company's gross profit margin is 40.91%, year-on-year-0.53ppt, which we think may be due to the fact that the microelectronics business is in the customer introduction period, some samples are included in the cost, and the fixed cost of aviation training business is high. 2) the rate of expenses during the period was 49.8%, which increased by 12.5ppt compared with the same period last year, of which the rate of R & D expenses was 10.0%, which increased by 5.1ppt, the rate of sales expenses increased by 1.2ppt to 2.5%, and the rate of management expenses increased by 1.5ppt to 24.2% year-on-year. 3) the net profit rate of sales is-1.2%, which is mainly caused by the losses of the non-wholly-owned subsidiaries Haiwei Huaxin (chip business) and Ansheng (simulator business). After excluding the profits and losses of minority shareholders, the net interest rate is 4.8%.

The increase in contract liabilities indicates that the order is booming, and the operating cash flow becomes positive compared with the same period last year. In terms of balance sheet, the company's accounts receivable and notes receivable totaled 678 million yuan as of 2021, a decrease of 6.14% compared with the beginning of the year. 2) the inventory is 361 million yuan, which is basically the same as at the beginning of the period. 3) the prepaid account was 76 million yuan, an increase of 172.35% compared with the beginning of the year, mainly due to the increase in the purchase of materials. 4) the contract debt is 77 million yuan, an increase of 19.7% compared with the beginning of the year, reflecting that the company has received more new orders and the demand is booming. In terms of cash flow, the net cash flow of operating activities in the first quarter was 51 million yuan, an increase of 75 million yuan over the same period last year.

Trend of development

The core equipment business of the "14th five-year Plan" is expected to grow high, and equity buybacks show management confidence.

The company is not only the leader of domestic aircraft MRO, but also an important subsystem supplier in the domestic aviation field, with high certainty of sustained business growth during the 14th five-year Plan period. The company conducted share buybacks from February 5, 2021 to March 24, 2021, with a total of 16 million shares repurchased, accounting for 2.105% of the total share capital, demonstrating the management's confidence in future development.

Expect chip subsidiaries and flight training simulator subsidiaries to reduce losses. 1) Haiwei Huaxin, a subsidiary of the company's chip business, is an advanced compound semiconductor IDM enterprise in China, and its products have successively sent samples to domestic 5G well-known communication equipment suppliers for verification. We expect that the improvement of its capacity utilization and projection rate in the future is expected to drive the gross profit margin up and reduce the overall loss. 2) with the global epidemic under control and the economic recovery of developed countries, we believe that the recovery of global aviation demand is expected to lead to the improvement of the company's aviation training simulator business, and we expect Ansheng subsidiary to reduce its losses in the future.

Profit forecast and valuation

Keep profit forecasts for 2021 and 2022 unchanged. The current share price corresponds to 2.2 times / 2.1 times book value in 2021 / 2022.

Maintain the neutral rating and 12.85 yuan list price, corresponding to 2.7 times 2021 market-to-book ratio and 2.7 times 2022 market-to-book ratio, which has 25.0% upside compared to the current stock price.

Risk.

The delivery of products and orders were lower than expected, and the prices of financial products fluctuated.