Event

The company released its 2021 results, KuaiBao, with an operating income of 3.588 billion yuan, an increase of 48.99% over the same period last year, and a net profit of 290 million yuan, an increase of 37.77% over the same period last year.

The company released the operating results from January to February 2022, and the smart family business won a total of about 881 million yuan (including tax), and the net profit is expected to increase by more than 40% compared with the same period last year.

Brief comment

1. Smart family business is growing rapidly, and it is estimated that the order that can be executed this year has exceeded 5.5 billion yuan.

The company announced its performance in 2021, KuaiBao, with an operating income of 3.588 billion yuan in 2021, an increase of 48.99% over the same period last year, and a net profit of 290 million yuan, an increase of 37.77% over the same period last year.

In 2021, the company's smart family business order size increased significantly compared with 2020, promoting the smart family business income to increase, the performance to achieve rapid growth, in line with market expectations.

With the support of national policy, the "double gigabit" network has developed at a high speed, and operators have further accelerated the layout of basic networks and smart homes, providing important opportunities for the development of the company's smart home business and 5G communication equipment business. the company continues to strengthen business management and safety production, effectively improve the level of operation management, and further improve the overall profit level.

From January to February of 2022, the company's smart family business won a total of about 881 million yuan (including tax), and the net profit is expected to increase by more than 40% compared with the same period last year. According to the company's three-quarter report, as of September 30, 2021, the outstanding order for the company's smart home business (excluding antenna project) is about 5.025 billion yuan, and the order amount for antenna project is 667 million yuan. It is estimated that the total outstanding order amount is about 5.692 billion yuan. In the fourth quarter of 2021, the company achieved operating income of 1.042 billion yuan, and the smart family business won 881 million yuan from January to February 2022. Based on this, we estimate that the company can execute orders of more than 5.5 billion yuan this year. Considering that the bidding work for operators' home broadband equipment has not yet fully started this year, the company's orders still have room for growth, which is expected to support the company's rapid revenue growth in 2022.

2. The company's gross profit margin declined in 2021 and is expected to stabilize and pick up this year.

In 2021, the company's revenue increased by 48.99%, operating profit increased by 16.46%, and net profit increased by 37.77%. This reflects a decline in the company's comprehensive gross profit margin in 2021 and a decline in net profit margin, but generally stable. We expect that, first, the company's income structure will change, and the proportion of smart home business income will increase significantly, and the gross profit margin of this business is lower than that of reading business. Second, the price of raw materials such as upstream chips will rise in 2021, affecting the company's smart family business gross profit margin. However, through expense rate control, the company has still achieved a stable net return rate.

With the opening of a new round of bidding, the company's quotations are higher than in 2021, and the overall trend of overlaying raw materials is alleviating. We expect the company's gross profit margin to stabilize and pick up this year, while with the rapid growth of revenue, the expense rate still has room to decline.

3. The 14th five-year Plan for the development of the digital economy has clearly accelerated the construction of gigabit networks.

On January 12, the State Council issued the Digital economy Development Plan of the 14th five-year Plan (hereinafter referred to as "the Plan"). It involves optimizing and upgrading digital infrastructure, giving full play to the role of data elements, vigorously promoting industrial digital transformation, accelerating digital industrialization, strengthening the security system of digital economy, and so on. The "Plan" clearly proposes to speed up the deployment of gigabit optical fiber networks, achieve full coverage of gigabit optical fiber networks in urban areas and key townships, and make it clear that the number of gigabit broadband users in 2025 will increase by 8.4 times that of 2020.

Gigabit home broadband has just entered the explosive phase, and penetration is expected to increase rapidly in 2022-2023. According to the statistics of the Ministry of Industry and Information Technology, there are 34.56 million gigabit broadband users in China at the end of 2021, of which there is a net increase of 28.16 million in 2021. Reviewing the development of 100 Gigabit Broadband, the penetration rate was 16.5% in 2016, 38.9% in 2017 and 70.3% in 2018, while the penetration rate of domestic gigabit broadband users was only 6.45% by the end of 2021.

With reference to the development process of 100 Gigabit Broadband, the penetration rate of gigabit broadband users is expected to increase rapidly to about 35% in 2022-2023. We expect that the annual net increase in the number of Gigabit Broadband users in China from 2022 to 2023 will be 70 million and 120 million respectively, which will promote the demand for home gateways. The company will fully benefit.

4. Shenzhen Zhaoneng deeply ploughs the field of optical fiber network access equipment, and its business has accelerated in recent years.

In April 2019, the company acquired Shenzhen Zhaoneng and actively laid out the smart family business. Shenzhen Zhaoneng is a leader in network intelligent terminal equipment, mainly providing telecom operators with broadband network terminals, IoT pan-intelligent terminals and other smart home devices and related services, including smart home gateways, IPTV/OTT terminals, WiFi6 and so on. Relying on the advantages of high-quality product technology and perfect marketing service network, Shenzhen Zhaoneng ploughs the operator market and has become one of the important suppliers of the three major operators.

After Shenzhen Zhaoneng was acquired by the company, its market share increased significantly. Shenzhen Zhaoneng was not selected in the open and centralized procurement of China Mobile Limited Smart Home Gateway from 2017 to 2019, while among the three procurement packages that China Mobile Limited Intelligent Home Gateway products purchased in 2020, Shenzhen Zhaoneng's share of purchase package 1 and purchase package 2 was 17.39% and 22.58% respectively, while purchase 3 was not selected. According to the announcement issued by the company on January 6 this year, of the two emergency centralized procurement packages for China Mobile Limited's smart home gateway products from 2022 to 2023, Shenzhen Zhaoneng's share of procurement package 1 and package 2 was 20.03% and 26.96%, respectively. We believe that after the acquisition of Shenzhen Zhaoneng, the good business relationship established by long-term cooperation with operators has obviously promoted the business development of Shenzhen Zhaoneng.

5. The company has become the first member of the meta-universe industry committee of China Mobile Limited Communications Federation, and the business layout of meta-universe has made further progress.

On January 11, China Mobile Limited Communications Federation Meta-Universe Industry Committee announced the admission list of the first batch of members, and Mercedes-Benz Information became the first batch of members and served as vice chairman. China Mobile Limited Communications Federation members include China Mobile Limited, China Unicom, China Telecom Corporation and so on. The Meta-Universe Industry Committee was approved and established on October 15, 2011. it is the first approved meta-universe industry association in China, which is committed to promoting the healthy and sustainable development of the meta-universe industry.

On November 9, 2021, the company signed a "Strategic Cooperation Framework Agreement" with China Mobile (Jiangxi) Virtual reality Technology Co., Ltd., and Dawei Robot Co., Ltd., to give full play to the advantages of research and development, products and solutions of the three parties in their respective industries, and jointly promote the application of VR/AR, robotics, artificial intelligence, digital twins and other achievements in smart city, wisdom education, culture and travel entertainment, digital factory and other fields. The company can provide VR/AR glasses equipment for the cooperation in terms of hardware, at the same time, the company has massive and high-quality digital reading content, and around the IP as the core of the network literature three-dimensional industry development new path, can provide rich entertainment content for the cooperation, and will explore VR/AR, robot meta-universe and other related fields, promote the 5G+VR related industry ecosystem construction.

The company has a long-term and close cooperative relationship with telecom operators, and there is a broad space for metacosmos business development in the future. Over the years, the accumulation of experience in the development and operation of value-added telecommunications services has enabled the company to establish an in-depth mutually beneficial cooperation model with telecom operators, which not only ensures that the company's existing products can make full use of operators' communication resources and charging system, but also lays a good foundation for multi-mode cooperation between the company and operators. We believe that the company started with the content business and has reached cooperation with China Mobile Limited on meta-cosmos-related business, and we do not rule out the possibility of establishing cooperative relations with other operators in the future. at the same time, the company's shareholders include Zhejiang Daily Digital Culture Group and Xinhuanet. there is a lot of room for imagination in the layout of meta-universe in the future.

6, profit forecast: the company is full of orders on hand, which can support the rapid growth of future performance, and there is a lot of room for imagination in the layout of meta-universe, so the profit forecast will be raised.

The company's smart home business won 881 million yuan from January to February 2022, and we estimate that the company's executable orders this year have exceeded 5.5 billion yuan, but this year, the bidding work for operators' home broadband equipment has not yet been fully started, and it is expected that more orders will be landed this year. This is expected to support the company to continue to achieve rapid revenue growth in 2022. Therefore, we raise the company's profit forecast and expect the company's operating income from 2022 to 2023 to be 5.55 billion yuan (+ 14%) and 7.45 billion yuan (+ 19%) respectively, with year-on-year growth rates of 66.67% and 34.23% respectively, and net profit of 486 million yuan (+ 8%) and 632 million yuan (+ 11%) respectively, with year-on-year growth rates of 60.32% and 30.03% respectively. The current stock price corresponds to 13X10X, respectively. The average PE of the company with a history of 3 years, 5 years and since listing is 25.78 times, 39.89 times and 41.48 times respectively. At present, the valuation is at the bottom of history, maintaining the "buy" rating.

7. Risk tips: smart family business development is not as expected; market competition is intensified; raw material supply is tight; cash flow is poor due to the occupation of communication equipment business; meta-universe business development is not as expected; market systemic risk and so on.