Incident Overview

The company released its 2021 annual report and 2022 quarterly report. It achieved revenue of 940 million yuan in 2021, an increase of 31.88% over the previous year, and the net profit of the mother was 163 million yuan, an increase of 17.71% over the previous year, after deducting the net profit of the non-return mother of 157 million yuan, an increase of 43.81% over the previous year. The first quarter of 2022 achieved revenue of 304 million yuan, an increase of 40.62% over the previous year, net profit of 55 million yuan, an increase of 41.06% over the previous year, after deducting net profit of 52 million yuan from non-return mothers, an increase of 36.90% over the previous year.

Analytical judgment

Downstream demand has been growing steadily, and the company's performance has maintained a high growth rate.

The company achieved revenue of 940 million yuan (+31.88%) in 2021, the market scale of military ancillary products expanded, some models of products were supplied in batches, and the company actively adjusted its product structure. Products in the basic business segment and integrated business segment showed a growing trend. High-performance transmission cables and components (basic business segment) achieved revenue of 710 million yuan (+40.82%), and optoelectronic systems and FC products (integrated business segment) achieved revenue of 218 million yuan (+41.25%).

The company achieved net profit of 163 million yuan (+17.71%) after deducting non-return income tax in 2021, net profit of 157 million yuan (+43.81%). The increase in performance was mainly due to strong downstream demand and mass production of some of the company's new products; the growth rate of net profit of Guimo was lower than the revenue growth rate, mainly due to the sharp reduction in income tax expenses after the company did not confirm deferred income tax assets were deducted earlier in 2020, which led to an increase in current non-recurring profit; the growth rate of net profit after deducting non-return income tax was higher than the growth rate of revenue, indicating an increase in the company's profitability. 2022Q1 achieved revenue of 304 million yuan (+40.62%), net profit of 54.83 million yuan (+41.06%), and net profit of 51.94 million yuan (+36.90%) after deducting net profit of non-return mother, continued the good growth trend of last year.

The company's gross margin was stable overall, and forward-looking indicators increased significantly.

The consolidated gross margins for 2021 and Q1 2022 were 46.46% and 44.89% respectively, down 0.90 pct and 3.06 pct respectively from the same period of the previous year. The main reason was a slight decline due to product restructuring, which was generally at a relatively stable level. The cost rate for the company period in 2021 was 25.26% (-1.33pct), of which the sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were 4.82%, 12.00%, 7.71%, and 0.74%, respectively, compared to -0.39pct, +0.23pct, -0.96pct, and -0.21pct. The 2022Q1 company's expenses rate for the period was 21.25% (-1.56 pct), of which the sales expenses rate, management expense ratio, R&D expenses rate, and financial expenses ratio were 3.04%, 10.30%, 6.72%, and 1.19% respectively, compared to -0.62pct, -2.07pct, +0.79pct, +0.35pct. The management expense ratio decreased significantly, and the level of cost control increased significantly.

The company had inventory of 559 million yuan (+64.41%) at the end of 2021, accounts receivable of 422 million yuan (+30.25%), accounts payable of 259 million yuan (+76.19%), and contract liabilities of 49 million yuan (+600%). The 2022Q1 inventory further increased to 602 million yuan, and accounts receivable increased to 654 million yuan. The sharp increase in forward-looking indicators indicates that the company's orders are full and that it is actively preparing for production and preparation, highlighting the high level of prosperity in the industry.

Shanghai Saizhi is wholly owned, and the company's profitability is expected to increase.

In March 2022, the company signed an “Equity Transfer Agreement” with Shanghai Saizhi's minority shareholders to acquire 39.07% of Shanghai Saizhi's minority shareholders' shares at a price of RMB 46.1 million. After the acquisition was completed, Shanghai Saichi became a wholly-owned subsidiary of Quanxin Co., Ltd. The acquisition is based on the gradual expansion and rapid growth of the application fields of FC fiber bus series products, further increasing capital investment in the field of FC fiber bus technology, expanding the production scale of related products to fully meet future growing market demand, and enhance core competitiveness. Shanghai Saizhi is a high-tech enterprise specializing in the design, development and manufacture of FC optical fiber bus series products. It is mainly engaged in R&D, production and sales of optical fiber bus switching systems. The product is mainly used in the aviation, aerospace and shipping fields. In 2021, Shanghai Saizhi achieved revenue of 94.67 million yuan, 2 net profit of 45 million yuan, net profit of 0 million yuan, a net interest rate of 25.87%, which is significantly higher than the company's overall net interest rate of 18.40%. After wholly owned holding, it helps to increase the company's performance and improve profitability.

In the field of FC fiber bus, the company laid out localized R&D work for FC fiber bus products ahead of schedule. It has completed the development and marketing of the nationally produced fiber channel node card series products, which have been fully recognized and widely used by the military market; completed the unified design work of the nationally produced 4G/8G rate fiber channel switch series products to obtain model support opportunities for various types of airborne and naval equipment; the national production of FC switches with autonomous and controllable core technology, and the successful development and installation of higher speed FC switches, marking the successful development and installation of the company's mass-produced FC products from the original communication sub-cards The end device extends to the entire FC network device. In terms of expanding the FC fiber bus market, the company adheres to the development idea of continuing to deepen the market in the advantageous fields of aviation and ships, expanding markets in emerging fields such as aerospace and weapons, focusing on the “14th Five-Year Plan” equipment development to rapidly achieve large-scale and industrialized development of the FC bus industry. In 2021, FC products were supported by an important strategic model in the aerospace field for the first time.

A fixed increase of 320 million yuan was raised for a number of projects, leading to an expansion of production capacity.

According to the “14th Five-Year Plan”, the company continued to strengthen production capacity building, enhance comprehensive delivery capacity through production line capacity expansion, equipment automation transformation, and improvement of MES production informatization, etc., and guaranteed delivery support tasks for many key models in the country. The company raised a targeted additional capital of 320 million yuan in 2021, mainly to expand production capacity in response to downstream market demand and expectations. It is mainly invested in “Aerospace High-Performance Cable and Rail Transit Data Cable Production Project”, “Integrated Wiring Harness and Optoelectronic System Integrated Product Production Project”, and “FC Fiber-optic Bus Series Product Production Project”. After delivery, the fund-raising project is expected to increase annual revenue of 1,529 million yuan and net profit of 234 million yuan. Construction of the new production line base is being stepped up, and production is expected to begin gradually in 2022. The sentiment of the demand-side industry continues to rise, and supply-side companies' capacity expansion is compounded by profit improvement expectations. It is expected that the company's performance will continue to grow at a high rate in the next few years.

Focusing on the field of military electronic information, the expansion of civilian goods is beginning to show results.

In the military goods field, since its establishment, the company has been mainly engaged in military business, focusing on the military electronic information field. It is mainly engaged in R&D, production, sales and service of a series of products such as military optoelectronic cables and components, optoelectronic components, FC fiber high-speed network and multi-protocol network solutions, optoelectronic system integration, etc. The company's products are mainly used in the five major military fields of aviation, aerospace, ships, electronics and weapons: the aviation field is mainly used in military aircraft such as fighter jets, helicopters, transport aircraft, early-warning aircraft, drones, etc.; the space field is mainly used in rockets, satellites, missiles and manned spacecraft; the ship field is mainly used in surface, underwater ships and various auxiliary ships; the field of electronics and equipment is mainly used in electronic systems such as communication, radar, electronic countermeasures, navigation, etc. 2021 is the year the “14th Five-Year Plan” began. Under the influence of the macro-international situation, order volume increased significantly due to the fact that key model products in some countries entered the mass production stage one after another.

In the field of civilian goods, the company is actively expanding commercial civilian goods markets such as rail transit, railway construction, commercial aircraft, and 5G communications. In 2021, the company made significant progress in localization in the fields of rail transit and commercial aircraft: the product was reviewed on-site by experts from the China Railway Inspection and Certification Center and passed full performance testing by a third party inspection agency to obtain a CRCC railway product certification trial certificate; completed COMAC's on-site audit and full product performance testing, successfully entered the COMAC QPL qualified supplier list, and began small-batch delivery. By reserving production capacity in advance, optimizing management and business processes, and adapting to the mechanism of rapid response for civilian goods, the company has been widely recognized by customers such as CRRC, Railway Construction Heavy Industries, China Railway Equipment, and COMAC. It has established a good image and laid a solid foundation for subsequent market expansion.

Investment advice

The company is the core supplier of military transmission cables and components and optoelectronic systems in China. It has rich development experience and advanced professional technology in related fields, and has core benefits in the context of military informatization and domestic substitution. Considering the continued rise in demand-side industry sentiment, supply-side company capacity expansion combined with profit improvement expectations, we adjusted the company's 2022-2023 revenue forecast from $1,214/1,657 million to $1,286/1,706 million, and EPS from $0.80/1.16 to $0.78/1.09 yuan. It is estimated that 2022-2024 will achieve revenue of 1,286/17.06/2,192 billion yuan respectively, and Guimu's net profit of 2.43/3.40/438 billion yuan, EPS is 0.78/ 1.09/1.40 yuan, corresponding to the closing price of 15.51 yuan/share on April 29, 2022, PE was 20/14/11 times respectively, maintaining the “buy” rating.

Risk warning

Fund-raising projects fell short of expectations; demand for FC fiber bus business fell short of expectations; and expansion progress in the civil sector fell short of expectations.