occurrences

On September 18, the company announced that its holding subsidiary, Changsha Shaoguang, received an integrated circuit layout design registration certificate from the State Intellectual Property Office, and that its self-developed domestic high-performance graphics processing chip SG6931 layout design was exclusively protected. Currently, the chip has been included in the list of domestic military reinforced computer components.

Brief review

The graphics processing chip has been certified and can be controlled independently to ensure information security. The chip SG6931, which has now obtained the integrated circuit layout design registration certificate of the State Intellectual Property Office, is a domestic high-performance graphics processing chip independently developed by the company. The chip was successfully completed for MPW streaming in early February this year, and optimization of the streaming film will begin soon at the end of September. It is expected that optimization of the streaming film will be completed by the end of the year, mass production and promotion of products will be achieved next year, and the market for weapons and equipment ancillary applications, civilian GPUs, etc. will be further expanded in the future. We believe that in the context of achieving autonomy and control in the GPU field, the company's high-performance chips with completely independent property rights will provide a strong guarantee in terms of national defense information security and continuous supply capabilities.

Sales growth costs have been reduced, and profit levels have increased significantly. In the first half of 2018, the company achieved revenue of 1,829 million yuan, an increase of 22.31% over the previous year; net profit attributable to the parent company was 241 million yuan, an increase of 295.12% over the previous year.

The gross profit margin of the company's overall business reached 26.58%, of which the average gross profit margin of the chemical business was 24.88%, an increase of 5.2% over the previous year; the average gross profit margin of the military business was 51.45%.

Three factors have led to a sharp increase in the company's net profit attributable to its mother. (1) During the reporting period, the company's main chemical business continued to improve. While sales revenue grew, operating costs were reduced through fine management; (2) the gross margin level of the military electronics business was far higher than the original chemical business; (3) the company's management expenses fell sharply by about 71 million yuan compared to the same period last year through refined management and personnel department adjustments to optimize the remuneration structure.

The release of military electronic orders, based on the strategic layout of scientific research

In the first half of 2018, military electronics benefited from the release of orders after the “military reform”, and its performance increased significantly compared to the same period last year. A certain model of bus controller, one of the company's core products, has been fully mass-produced. Currently, the total demand for in-hand orders has reached 12,000 units, which is expected to exceed 15,000 units throughout 2018; another core product of the company, a certain type of chip, has also entered the batch supply stage during the reporting period.

In the first half of the year, the company set up a wholly owned subsidiary of Shenyang 435 Microelectronics Co., Ltd. and set up a R&D team; carried out targeted research project layout, fully participated in multi-military research project bidding, and obtained qualifications for participation in more than 10 scientific research projects; the company reached a comprehensive cooperation agreement with Ordnance Industry No. 14, which complements each other's strengths and enhances the integrated circuit technical strength of listed companies. Under the general situation where demand for the localization of military chips is becoming increasingly urgent, the high growth momentum of the company's military business is expected to continue.

Strategic investors enter the market, focusing on military electronics

On May 4, Xinyu Huanya took shares in Xinyu Haoyue. After the capital increase is completed, Xinyu Huanya will hold 29.013% of Xinyu Haoyue's shares. Xinyu Haoyue is the controlling shareholder of the company and holds 28.66% of the listed company's shares. Prior to this capital increase, Huoshu and Wuhan Ruihe held 83.33% and 16.67% of the shares of Xinyu Haoyue, the controlling shareholders, respectively.

According to the signed agreement, Xinyu Huanya plans to increase Xinyu Haoyue to 300 million yuan and Torchtree plans to increase its capital by 134 million yuan. At the same time, Torch Tree will transfer Xinyu Haoyue's shares held by Wuhan Ruihe. After completion, Torch Tree will hold 70.987% of Xinyu Haoyue's shares, and Xinyu Huanya will hold 29.013% of the shares.

Strategic investors have been deeply involved in military electronics for many years, and entering companies is conducive to promoting the extension and endogenous growth of the company's military business. One of the parties to this agreement, Xinyu Huanya's executive partner Zhang Ya, is the same person as one of the parties involved in the company's acquisition of Changsha Shaoguang and Waco Electronics. Mr. Zhang Ya has been deeply involved in the military electronics field for many years. He is a shareholder and controlling shareholder of more than 10 electronics companies, including Changsha Shaoguang, Shenzhen Xinyuan Semiconductor, Nanjing Zhongxu Electronics, and Chengdu Cisco Microelectronics, who have introduced Xinyu Huanya as a strategic investor, which is conducive to the endogenous+extended expansion of the company's military industry business, providing favorable conditions for the company to develop the military electronics industry chain.

Profit forecast and investment rating: Chemical industry continues to improve, transformation of military electronics enhances profitability, and maintains purchase ratings. We are firmly optimistic about the company's future development prospects. We predict that the company's net profit from 2018 to 2020 will be 510 million yuan, 585 million yuan, and 722 million yuan respectively, with year-on-year increases of 99.22%, 14.64%, and 23.48% respectively. The corresponding EPS from 18 to 20 was 0.74 yuan, 0.84 yuan, 1.04 yuan respectively. The corresponding PE was 14, 12 and 10 times, respectively. Taking into account factors such as the company's scarcity, the possibility that its performance will exceed expectations, and future outreach expansion, we believe that the company has the potential to grow into a leading military electronics industry, has broad scope for future development, and maintains a buying rating.