2020Q3 net profit increased 17% year-on-year, waiting for the release of space equipment.
Events:
On October 27, 2020, the company released three quarterly reports, with revenue (1.037 billion yuan, + 8.39%), net profit (225 million yuan, + 13.67%), revenue (342 million yuan, + 14.67%) and net profit (66 million yuan, + 17.2%) in the first three quarters.
Comments:
The income growth rate increased quarter by quarter, and the three major sectors made steady progress. Revenue was achieved in the first three quarters of 2020 (1.037 billion yuan, + 8.39%). In a single quarter, the income growth rate in the first three quarters was 1.56%, 9.06% and 14.67%, respectively. The revenue growth rate increased quarter by quarter, mainly on the basis of the implementation of epidemic prevention and control measures by the company and its subsidiaries. Steadily started all kinds of work, and achieved stable growth overall, during the reporting period. The business of the company's electric power plate, military industrial plate and railway and rail transit plate is advancing steadily. The 100MW wind power project built by Sun Company Zhongning County Yinqian New Energy Co., Ltd. has passed the 240th acceptance and officially put into commercial operation.
The growth rate of net profit is higher than revenue, or due to the increase in gross profit margin of railway tracks and new energy, and military business. For the first three quarters of 2020, the consolidated gross profit margin is 47.6% (+ 2.45pct). With reference to the half-yearly segment gross profit margin, we believe that the reason is that, on the one hand, the railway and rail traffic and new energy divisions have higher gross profit margin due to the higher gross profit margin of the power generation business. On the other hand, the increase in the income scale of the military industrial division brings a double increase in gross profit margin and income share. It is expected that with the continuous increase in the proportion of military business, the company's gross profit margin is expected to reach a new level.
The expense rate during the first three quarters was 25.23% (+ 4.48pct), of which the sales expense rate decreased 2.09pct, which was related to the reclassification of sales-related freight to operating costs, while the management expense rate and R & D expense rate increased slightly by 0.29 and 0.26pct, respectively. The increase in the expense rate during the period was mainly due to the increase in the financial expense rate compared with the same period last year (6.03pct), the interest apportioned by convertible bonds according to the effective interest rate, and the financial lease interest of Zhongning wind power project.
Multiple items on the balance sheet indicate better orders. The ending inventory increased by 85.14% over the beginning of the year, and the raw materials of Starwave Communications, the main parent company and subsidiary, were mainly used for the preparation of on-hand orders, reflecting that the order situation was better; correspondingly, the acceptance of raw materials into the warehouse reduced the advance payment by 50.21%; the prepaid account and contract liabilities increased by 7% over the beginning of the period, mainly because the contract payment received in advance had not yet been accepted and confirmed. Accounts receivable at the end of the period increased by 27.76% compared with the beginning of the year, mainly due to income growth and a decline in the rate of repayment. The company's main customers come from large state-owned enterprises such as electric power, military industry, railways and some overseas customers, which are affected by their settlement practices. the collection cycle of accounts receivable is relatively long, but the risk of non-recovery is relatively small. At the end of the period, other non-current assets decreased by 55.79%, mainly due to prepaid equipment and project funds, mainly because part of the equipment has been checked and accepted into storage and Hanpu's new plant has been completed and put into use.
According to the cash flow statement, the net cash inflow of operating activities was 131 million yuan, compared with a net outflow of 9.47 million yuan in the same period last year, mainly due to the decrease in the margin of guarantee and notes payable paid by the subsidiary Yinchuan Wolong during the reporting period compared with the same period last year. The net cash outflow from investment activities was 125 million yuan, a decrease of 54%. This is mainly due to the fact that the investment in the Zhongning wind power project occurred in 2019, so the cash paid for the purchase of fixed assets, intangible assets and other long-term assets in the current period decreased compared with the same period last year. The net cash outflow from fund-raising activities was 110 million yuan, down 53% from the same period last year, due to the issuance of convertible bonds during the reporting period.
The wholly-owned subsidiary Starwave Communications Aerospace equipment accounts for a high proportion of business, with full orders and high flexibility. Starwave Communications, a wholly owned subsidiary, is the core supporting unit of the aerospace equipment radar seeker. The annual report shows that Starwave Communications is one of the few private enterprises in China that provide combined products for multiple missile-borne weapon platforms, with a high level of supporting equipment, a large number of supporting weapons and equipment, and a high amount of supporting value. The high prosperity in the field of aerospace equipment will contribute considerable performance flexibility to the company.
From the perspective of technology accumulation, Starwave Communications has long focused on radar and electronic countermeasures in the field of microwave, and has developed into the first echelon of military microwave private enterprises, and its microwave hybrid integrated circuit business has a large growth space. The growth rate is faster than the overall growth rate of the military industry.
From the point of view of orders, only the last two announced orders have reached 3.6 times the revenue of Starwave Communications in 2019 (140 million yuan), and the delivery time is mainly in 20 and 21 years, while Starwave Communications Aerospace equipment has a high supporting level and strong profitability. The net interest rate of Starwave Communications in 2019 is as high as 46.4%. According to the 19-year net interest rate level, the announced order alone is expected to bring the company a net profit of more than 160 million yuan. The company is expected to have high performance growth in the future.
Earlier, it issued a draft of 100% equity in Zhiliang Electronics Company, which acquired the electronic war mark, to strengthen the military electronics business one step further. Zhiliang electronic products cover four categories: electronic reconnaissance, electromagnetic protection, radar anti-jamming and simulation training. it is a typical high-quality and growing enterprise with high barrier, light assets and high technology content. According to the forecast report of MarketsandMarkets, the global market space for electronic warfare will exceed 30 billion US dollars by 2022. With the urgent need of domestic system confrontation, the domestic electronic warfare field is expected to grow at a high growth rate. Electronic warfare equipment is the focus of development under the background of our military system confrontation. At present, in China, in addition to China Power 29, Aerospace Science and Technology 8511, China ship 723, etc., Zhiliang Electronics is a very small number of domestic enterprises with radar countermeasure system level and the whole industry chain supporting cooperation capabilities, with military electronic countermeasures, electronic reconnaissance, electronic defense and radar simulation product lines.
The performance of Zhiliang Electronics is growing rapidly. according to the performance commitment of the other party in this transaction, the performance commitment of deducting non-net profit from 2020 to 2022 is 47.8 million yuan, 57.36 million yuan and 68.83 million yuan, with a growth rate of 18.80%, 20% and 20% respectively. In 2019, revenue reached 87.82 million yuan (year-on-year growth of + 52%), deducting non-net profit of 40.2317 million yuan (year-on-year growth of + 72%). From January to May 2020, the revenue was 36.55 million yuan, the net profit was 22.52 million yuan, and the net profit margin was as high as 61.2%.
Strengthening the development of the military business sector is the company's long-term development strategy, the high growth of military business led to a rapid increase in the proportion. In 2017, through the acquisition of Star Wave Communications, it quickly cut into the field of military electronics, adding new military business such as microwave devices, microwave components and subsystems. According to the company announcement, Chengdu Dingyi, a subsidiary of the company, has successfully developed military infrared products such as infrared seeker, laser seeker and infrared movement components for targeting, and will vigorously expand sales channels and market share to the military industry in the future. After considering the acquisition of 100% stake in Zhiliang Electronics, the military business has added new forces to enter the field of electronic countermeasures. The company revolves around the endogenous + epitaxial development in the field of military electronics, and the proportion of military electronic business is expected to increase rapidly. 2020 is the key year for the development of the company's military strategy, and the in-depth layout under the high-quality track of military electronics is worth looking forward to.
The steady growth of electric power and rail transit plates has benefited from new infrastructure investment such as UHV and rail transit, resulting in sound profits. The company is the leader in the power monitoring and testing industry, and its products are mostly used in the power grid field of 110kv and above. The beneficiary power grid company continues to promote the equipment management mode of condition-based maintenance, strong smart grid + ubiquitous power Internet of things construction and distribution network construction, maintaining steady growth.
Yinchuan Transformer is the leader of railway traction transformer, which benefits from the continuous investment in railway infrastructure construction in China, including the trunk lines in the central and western regions, the construction of double lines, branch lines and tie lines in the central and eastern regions, the electrification transformation of old lines, and the natural replacement of lines with an operating life of more than 15 years.
Investment suggestion: it is optimistic that the following increase in the proportion of military business will become the core target of military electronics. It is expected that with the entry of electronic countermeasures company Zhiliang Electronics, the military business will have higher growth, and the proportion of military profits of the company is expected to increase rapidly. Its Starwave Communications is a relatively pure company in the aerospace equipment track, with a high proportion of aerospace equipment business, multi-type products are in the early stage of volume, and the signed orders are very full and the performance is highly flexible. In addition, the company's long-term layout of the military industry, it is expected that after the entry of Zhiliang Electronics, the proportion of the company's military business will increase rapidly. We believe that the value of the company's military business has not been fully reflected, and the valuation is expected to continue to be reshaped. Without considering the combination of Zhiliang for the time being, we expect the return net profit in 2020, 2021 and 2022 to be 310 million, 450 million and 580 million, corresponding to the valuation of 30X, 21X and 16X in 2020, 2021 and 2022, which is the target for the growth of military electronics. There is a lot of room for valuation flexibility to reshape and maintain the "Buy-A" rating.
Risk hints: bidding for electric power monitoring and testing products is not up to expectations, railway investment is not up to expectations, weapons and equipment procurement is not up to expectations, and Zhiliang Electronics acquisition is not as expected.