I. Overview of events

On August 19, the company released its semi-annual report for 2020, with operating income of 457 million yuan, down 2.61% from the same period last year, and net profit of 58.41 million yuan, down 15.38% from the same period last year.

II. Analysis and judgment

The performance has declined slightly and is optimistic about the breakthrough for the whole year.

In the first half of 2020, the company realized operating income of 457 million yuan, down 2.61% from the same period last year, and realized net profit of 58.41 million yuan, down 15.38% from the same period last year. In a single quarter, Q2 realized revenue of 324 million yuan, an increase of 9.51% over the same period last year, and its net profit was 40.82 million yuan, down 23.98% from the same period last year. During the reporting period, the expenditure rate during the period was 30.44%, an increase of 2.66pct over 27.78% in the same period last year, mainly due to a significant increase in R & D investment and financial expenses, of which R & D expenditure was 38.81 million yuan, an increase of 60.37% over the same period last year. In terms of profit margin, the company's gross profit margin was 47.30%, down 1.27pct% ROE from the same period last year to 1.54%, down 0.37pct from the same period last year.

The business of Hengda Microwave and Radar has increased significantly.

The company began to show Hengda Microwave in March. At present, the main bodies of radar business are Science and Technology Reike and Hengda Microwave, which is in a leading position in the field of phased array radar, synthetic aperture radar and millimeter wave radar. During the reporting period, the revenue of the radar business reached 146 million yuan, an increase of 55.33% over the same period last year, mainly due to Hengda microwave amalgamation and continuous volume of existing radar projects. A special millimeter wave radar of the company is expected to be released from this year, with considerable space in the future. We believe that the radar field of the company is the core driving force of the future performance, and Hengda Microwave will continue to increase the volume after the landing of the research model, and Hengda Microwave will apply military millimeter wave radar antenna technology to the 5G field, which has a broad market prospect in the future.

The on-board products are expected to continue to grow, and the company in the field of Leo satellite communications is the research and development unit of the core subsystem of China's military remote sensing satellite, and its technical strength is leading in this field. During the reporting period, revenue from satellite applications reached 188 million yuan, down 5.49% from the same period last year. We believe that the recognition rhythm of on-board product revenue led to a slight decline in revenue in the first half of the year, but in the long run, satellite business is still the company's future growth point. The company's on-board products guarantee the launch tasks of "a census satellite" and "high-score multimode satellite", which are currently operating normally in orbit. In addition, the company began to lay out the field of low-orbit satellite communications, has undertaken a number of spaceborne, ground stations of microwave product development tasks, and has achieved partial delivery.

Delivery of smart ammunition is delayed, safe storage business is declining.

The company's intelligent ammunition business includes seeker, on-board computer, and so on. During the reporting period, revenue of intelligent ammunition reached 56.01 million yuan, down 32.42% from the same period last year. Due to the impact of the epidemic, the procurement cycle was prolonged, and product delivery was delayed accordingly. We believe that with the elimination of the impact of the epidemic, the field of smart ammunition is expected to recover in the second half of the year. The revenue of secure storage business reached 60.17 million yuan in the first half of the year, down 28.95% from the same period last year. In the follow-up, a number of projects in the business will enter the finalization stage, and it is optimistic that the business will resume steady growth.

III. Investment suggestions

The company continues to develop in the field of military electronics, and forms a strong competitiveness in the fields of radar, satellite, intelligent ammunition and secure storage. We are optimistic about the long-term development of the company. It is estimated that the EPS of the company in 2020-2022 is 0.19,0.25,0.32 yuan respectively, corresponding to the PE of 52X, 40X and 31x. The average valuation of the comparable company is 70X, with a "recommended" rating.

IV. Risk hints

The company has high goodwill; defense budget growth is not as expected; business integration is unable to achieve synergy.