For the first time, the military representative of the military, electronics, and the global leader in MEMS foundry, covered the “buy” rating for the first time, with a target price of 32 yuan. 1) The company is based on the traditional navigation business, with internal and external expansion, laying out avionics and MEMS business. The military electronics platform has gradually taken shape. We believe that with the arrival of the peak of compensatory procurement of weapons and equipment in the “post-military reform era” and the advancement of the deepening development of military and civilian integration, it is expected to benefit from the improvement in military expenditure execution efficiency and the degree of weapons and equipment informatization. 2) As a global MEMS OEM leader, the wholly-owned subsidiary Silex will benefit from the booming development of the industry. 3) We expect the company's 2018-2020 EPS to be 0.36/0.64/0.89 yuan, and CAGR of 57%. Combined with comparable company valuations, we will give it 50 times the PE in 2019, corresponding target price of 32 yuan, a “buy” rating.
The inflection point of the military electronics industry has reached, and it will welcome a return to high growth. 1) Navigation: Since its launch in 2015, the company has completed the entire industry chain layout from basic devices to inertial measurement units to lasers, optical fibers, and MEMS inertial guidance systems. Although 2016-2017 was affected by the military reform, the expansion of new navigation products and new application fields continues. With the end of the military reform and the arrival of the peak of compensatory procurement, development will accelerate. 2) Avionics: Through endogenic+outreach, various military avionics products have been batch equipped with certain types of aviation aircraft to achieve rapid expansion. In the future, they will continue to share the high prosperity dividends of the aviation sub-sector.
New opportunities in the Internet of Things era to build an international leader in MEMS foundry. 1) According to Yole Development's forecast, the global MEMS foundry business CAGR will exceed 20% in 2014-2019. Silex, a wholly-owned subsidiary, is a leading company with the top three global MEMS OEM market shares, leading technology and excellent customer resources, and is expected to continue to grow rapidly in the future. 2) Production line upgrades provide a basis for growth: The Swedish MEMS production line upgrade has been completed, the Beijing 8-inch line is progressing smoothly, and the international foundry line project will greatly increase production capacity.
Major national funds plan to strategically increase their holdings, and the company is expected to continue to benefit. The company is one of the three strategic investment targets of the National Capital Fund (China Integrated Circuit Fund) in the MEMS field. At the same time, the large fund plans to subscribe no more than 1.4 billion in the MEMS domestic 8-inch cable project. The company's future development will benefit from the strategic support of the Big Fund platform.
Risk warning: 1) Orders in the military goods sector are highly volatile; 2) the risk of increased competition in the MEMS market.