Key points of investment:
Based on optoelectronic measurement and control technology, we continue to enrich the product structure and expand the application market. Oppo Optoelectronics's main products are optoelectronic measurement and control instruments and equipment, which are used in national defense and military fields such as new equipment support, upgrading of existing equipment, or scientific national defense tests. The company has a leading advantage in the field of optoelectronic measurement and control. Products such as TV angle finders, radar antenna holders, optoelectronic latitude and longitudiners have a high market share. After listing, Optoelectronics successively cultivated optoelectronic devices (subsidiaries Changguang Chenxin and Aoli Infrared) and grating sensing products (subsidiary Yuheng Optics) businesses by acquiring and investing in subsidiaries. Since listing, the revenue share of the optoelectronic measuring and control instrument business has declined from over 85% to about 50%, and gross margin has declined from 53% to 37%. Currently, the optoelectronic device and grating sensor product business accounts for about 45% of total revenue, and the gross margin is higher than that of the optoelectronic measurement and control instrument business. From 2010 to the first three quarters of 2017, the company's comprehensive gross margin remained stable, with an average annual gross margin of more than 40%. Affected by rising management expenses, the company's net interest rate has declined slightly since 2014, and has been around 17% to 18% in the past three years.
Rely on the Changchunguang Institute of the Chinese Academy of Sciences to build an industrialization platform for the research institute. The controlling shareholder of Optoelectronics is Changchun Optoelectronics, with a shareholding ratio of 42.65%. The Changguang Institute is one of the largest research institutes in the Chinese Academy of Sciences. It is mainly engaged in scientific research work in the fields of applied optics, luminescence, precision mechanics, and optical engineering technology. At the beginning of Oppo Optoelectronics's listing, Changguang promised that “any military product used for scientific research purposes can be mass-produced, and the firm will invest all of the production of such products in Oppo Optoelectronics Technology Co., Ltd.”; by the end of 2016, Changguang's total assets reached 5.562 billion yuan, net assets were 1,715 million yuan, and business revenue was 891 million yuan, 5.7 times that of Oppo Optoelectronics during the same period, respectively.
It has strong independent research and development capabilities, and is optimistic about the market prospects of new products such as CMOS and airport pavement foreign matter monitoring. Oppo Optoelectronics has a comprehensive R&D and manufacturing system integrating optics, mechanics, and electricity. It has technical advantages in casting, machining, optical processing, etc., and has strong independent innovation capabilities. It has obtained many patents and launched new products such as CMOS and airport pavement foreign matter monitoring systems. As early as the beginning of 2012, the company and a department of the Air Force jointly developed China's first airport pavement debris monitoring system, which reached leading domestic and international advanced levels, filling the gaps in this field in China. The monitoring system is different from traditional manual inspection and millimeter-wave radar scanning monitoring methods. An optical imaging method is used to monitor, locate and alarm foreign objects with a particle size greater than or equal to 5 mm on the surface of the airport road. The technical indicators meet the requirements for the promotion and use of military and civil airports. The company is making every effort to promote the marketing of the airport pavement foreign matter monitoring system. Optoelectronics Changguang Chenxin focuses on the design and development of high-performance CMOS image sensors, and the product performance has reached the leading international level. Since its establishment in 2012, Changguang Chenxin has continuously strengthened its product design capabilities and mass production capabilities, and continuously improved the market competitiveness of its products in the fields of industry, medicine, scientific research and biological imaging. Changguang Chenxin's performance has maintained a high growth rate in the past four years. As of 2016, sales volume exceeded 40 million yuan, and net profit was about 15 million yuan.
Profit forecasts and investment recommendations. We expect Optoelectronics's net profit from 2017 to 2019 to be about 39 million yuan, 45 million yuan and 53 million yuan, corresponding to EPS of 0.16 yuan/share, 0.19 yuan/share and 0.22 yuan/share. Considering the company's leading advantage in the field of optoelectronic measurement and control and the market prospects of civilian products, combined with the valuation situation of comparable companies, we gave Oppo Optoelectronics 100 times its PE valuation in 2018, corresponding to a target price of 19.00 yuan/share within 6 months, covering the company's “increase in holdings” rating for the first time.
Risk warning. Market development for new products fell short of expectations; fluctuations in military orders; technology development risks.