Comment

First, deep ploughing air traffic control automation system, the acquisition of Huaan Tiancheng 23% stake.

As a leading software and equipment provider in the air traffic control industry, the company's main products include air traffic control real-time command system and air traffic control simulation training system. The company's business currently covers three major areas: military air traffic control, civil aviation air traffic control and navigable air traffic control.

1. Air traffic control of military aviation

In the part of military aviation air traffic control, although the overall scale of military aviation is smaller than that of civil aviation market, the share of domestic equipment is higher than that of civil aviation market. According to the data of forward-looking Industrial Research Institute, the company currently ranks first in the market share of air traffic control automation system products in the field of military aviation. In 2013, the company won the bid for the "new generation XX control center system" project of the Office of the State Air Traffic Control Commission, and the two bidding sections of the air traffic control automation system were about 238 million yuan, but the contract for the project was not signed due to factors such as the adjustment of the military reform organization, which dragged down the company's operating performance in recent years. The company acquired a 23.08% stake in Beijing Huaan Tiancheng Technology Co., Ltd. (hereinafter referred to as "Huaan Tiancheng") in November 2017. By virtue of its technical advantages in airspace management, Huaan Tiancheng has assumed the role of technology support and project demonstration in the projects entrusted by enterprise customers, such as military and civil aviation, local government, airport, navigation and so on. And Huaan Tiancheng and the company won two bids in the National Air Traffic Control Commission office tender "new generation XX control center system" project, totaling about 474 million yuan, although the contract has not yet been signed, but with the gradual recovery of the military products and air traffic control market, if the order is landed in the future, it will play a big role in boosting the company's future performance.

2. Civil aviation air traffic control

In the part of civil aviation air traffic control, the company mainly provides services for air traffic control automation system and air traffic control training, mainly for customers of major ATA control units, small and medium-sized airports and civil aviation colleges and universities. In terms of civil aviation air traffic control automation system, the company signed a new contract of 190 million yuan in 2018, which will further contribute to the company's performance growth with the successive delivery of related contracts in 2019.

3. Navigable air traffic control

In terms of navigable air traffic control, the company mainly includes many products, such as low-altitude airspace control system, navigable flight management system, low-altitude flight service system and so on. At present, with the gradual opening up of China's low-altitude areas and the continuous introduction of policies to support the navigation industry as a whole, the number of navigation enterprises in China is also on the rise. as of 2018, the number of navigation enterprises approved by the Civil Aviation Administration of China has reached 422, compared with 103 in 2012. Under the background of the rapid development of China's navigation industry, this part of the business of the company still has a lot of room for growth.

Second, the flight simulator is put into full load, and the radar products focus on the low-altitude field. At present, the four A320 D-class flight simulators purchased by the company are all put into training services at full load. The company acquired 18.32% of Tianjin Huayi Blue Sky Technology Co., Ltd. (hereinafter referred to as "Huayi Blue Sky") in March 2019. Huayi Blue Sky, as the first share of the new three-board flight simulator, has focused on the R & D, production and sales of flight simulator equipment since its inception, and has been authorized by French Airbus, American Boeing Co and other domestic and foreign aircraft manufacturers. And more than ten types of flight simulators have been successfully developed. At present, the Airbus A320 full mission simulator being developed by Huayi Lantian will also be sold with the company's flight simulator visual system in the future, further increasing the company's market position in the field of flight simulator and achieving win-win cooperation. And the Civil Aviation Air Traffic Management rules

Controllers are required to carry out route learning or flight simulation training every year. Under the dual advantages of the above policy background and the company's market position, the company's flight simulator business is expected to usher in great opportunities in the future.

The company's radar products are mainly "low-altitude surveillance radar". The products focus on the open development trend of China's low-altitude field, through automatic detection and effective tracking of military aviation, civil aviation and navigable aircraft in low-altitude airspace, realize the surveillance, early warning and accountability of the airspace of the airport. At present, the product has been tested in many airports in Sichuan Province, and in the future, it will connect Hainan and further implement the demonstration application of "low-altitude security surveillance radar networking and service" in the region, and provide active low-altitude surveillance means for the party, government, military, police and people.

III. New 3D face recognition product launch, VR/AR business strategy transformation ushering in development opportunities the company held a 3D face recognition new product launch on September 23, 2019, which included high-precision 3D full-face modeling hardware and software, 3D face recognition certification and access control products, air traffic control voice recognition and security warning products, etc. The launch of this new product will enrich the company's existing product structure and further consolidate the company's competitive advantage and position in the industry.

At present, the company's face recognition related products include 3D full face camera, high security access control and building intelligent personnel management system and so on. In 2018, the newly signed contract amount was about 182 million yuan, a substantial increase over 2017, mainly including high-precision 3D face photography, railway "people, certificates, tickets" self-service inspection channels and expressway traffic violations and testing products. In August 2019, the company signed a cooperation framework agreement with Southwest University to jointly establish Chongqing 3D face big data Industrial Technology Research Institute. The two sides will cooperate in the areas of high-precision 3D portrait collection, database construction and dynamic recognition, and are expected to achieve "dynamic face recognition" in the future, and will be further applied to smart campuses, community security and other major fields. The new face recognition product release will also further expand the application scene and core competitiveness of the company's existing products.

At present, the company's virtual reality and augmented reality business (VR/AR) mainly includes flight training simulator, flight training simulation system, air force tactical combat simulation system and popular science experience products.

Since 2017, the company has made an overall strategic transformation of its VR/AR business, expanding its target market into "toB" and "to C". "toB" mainly trains air traffic controllers by providing flight simulator products, with a high technical content but a relatively small market. With the strategic transformation of the company in 2018, this kind of training products have been expanded to the "to C" market for popular science experience, and transformed into high-end training products for young people, which are not only demonstrated and applied in Sichuan Science and Technology Museum, but also promoted in other cities across the country.

Fourth, seize the opportunity to carry out industrial integration and improve its own industrial chain. In May 2016 and March 2019, the company invested 3 million yuan and 39.2 million yuan respectively to acquire 666700 and 7 million shares of Huayi Lantian, with a total stake of 20.52%.

In November 2017, the company subscribed for Huaan Tiancheng 12 million yuan with its own capital of 37.44 million yuan, accounting for 23.08% of Huaan Tiancheng's equity after the capital increase.

In recent years, due to the impact of the military reform and the lower-than-expected progress of the military aviation air traffic control construction, the primary and secondary market of the military industry is generally in the doldrums, and the asset valuation has declined as a whole. Although the company's main military aviation industry has also been adversely affected, the company has made use of capital market forces to carry out industrial consolidation to acquire and increase capital for the above two companies with a relatively reasonable valuation, so as to lay a solid foundation for a new level of business in the future.

5. Profit forecasts and investment suggestions:

In the field of domestic air traffic control automation system, the company has obvious technical strength and advantages, and constantly improves its own industrial chain through mergers and acquisitions; the negative impact of military aviation without landing has been gradually eliminated after nearly six years; in the future, with the independent controllable requirements and the development of military aviation, civil aviation and navigation air traffic control construction, the company will significantly benefit. At the same time, in the field of face recognition and virtual reality, the company has achieved remarkable performance in intensive cultivation. Relying on colleges and universities, based on advanced technology and deep integration of military and civil business, the company is a "small and beautiful" enterprise in the subdivision field. In the future, air traffic control, flight simulation, face recognition, VR/AR and other businesses, once there is a breakthrough, may have a very strong explosive power. We estimate that the return net profit of the company from 2019 to 2021 is 68 million yuan, 80 million yuan and 92 million yuan respectively, and the EPS is 0.30,0.36 yuan and 0.41 yuan respectively. The target price is 19.56 yuan, corresponding to 65x, 54x and 48x in 2019-2021, respectively.

Risk Tips:

The decline in market demand; the lower-than-expected demand for military products; and the decline in profitability as a result of intensified competition in the industry.