Key points of investment

The company released its report for the third quarter of 2022. It achieved revenue of 386 million yuan in the first three quarters of this year, an increase of 2.02% over the previous year, achieved net profit of 89.36 million yuan, an increase of 10.01% over the previous year, and achieved net profit of 77.85 million yuan after deducting non-return mother's net profit of 77.85 million yuan, an increase of 25.02% over the previous year. The third quarter alone achieved operating income of 204 million yuan, a year-on-year decrease of 1.98%, a year-on-year net profit of 65.99 million yuan, an increase of 11.03% over the previous year, and net profit of non-return mothers was 6.09 million yuan, an increase of 20.66% over the previous year.

Increase investment in R&D to consolidate technological advantages and optimize costs to improve profitability. The company's gross margin for the first three quarters was 59.81%, a year-on-year decrease of 2.83 pct. We think it is related to changes in the pace of product delivery and revenue structure. The company's R&D expenses in the first three quarters were about 90 million yuan. The R&D expense ratio decreased year-on-year, 6.15 pct to 23.3%. The main reason was that the company's R&D investment that entered the development stage was included in development expenses according to the progress of R&D projects and the accounting policy for capitalizing R&D expenses. The company's development expenditure reached 118 million yuan, an increase of 65.85% over the beginning of the year. At the same time, the balance of the company's prepaid accounts at the end of the reporting period due to the purchase of R&D instruments and equipment was 40.45 million yuan, an increase of 126.91% over the beginning of the year. The increase in R&D investment and the procurement of large amounts of R&D instruments helped consolidate the company's technological leadership and expand its business field. The company's sales, management, and financial expenses rates for the first three quarters were 6.29%, 8.59%, and -3.8%, respectively. The year-on-year changes were -2.93pct, -1.87pct, and -0.18pct, respectively. The reason for the large changes in the sales expense ratio was the reduction in the wages and salaries of sales staff due to changes between the company's organizational structure departments. Under the optimization of the cost rate for the period, the company's net interest rate for the first three quarters increased 1.68 pct to 23.14% year-on-year.

The construction of military informatization is in its infancy, and the military broadband mobile communication industry may experience growth. Currently, China's military is in the early stages of information technology construction. There is a big gap with developed countries. It is guided by the country's core security needs, focusing on building an information-based army, winning the war on information technology, comprehensively deepening national defense and military reform, striving to build a modern military force system with Chinese characteristics, and continuously improving the military's ability to cope with various security threats and complete diverse military tasks is the strategic direction of China's national defense industry development. The international situation has been tense in recent years, which is conducive to the advancement of the national defense informatization strategy. Military communication systems will surely enter the stage of rapid construction. Currently, the main combat equipment of the Chinese military is still mainly narrowband communication technology. In order to shorten the gap between the level of information systems of our military and foreign armies as soon as possible, our military's need to improve the level of information systems is very urgent. With the gradual implementation and improvement of the “Opinions on Deepening National Defense and Military Reform”, the entire army may usher in rapid development of narrowband to broadband informatization in the next 5 years, and the military broadband mobile communication industry is expected to usher in explosive growth.

It covers many fields and types of military, and is in a leading position in the military broadband mobile communication industry. The company mainly focuses on the development, production and after-sales service of military 4G/5G tactical communication equipment. It focuses on the military industry with land, sea, air, rocket forces and strategic support forces as the main users, and provides equipment and overall solutions for private network broadband mobile communication systems. In the field of military broadband mobile communications, the company is in a leading position in terms of technical reserves, commercialization capabilities, number of models and equipment, and market share. As of June 30, 2022, the company has finalized a total of 38 models and equipment in development. The company's new products continue to expand in many fields and models, laying the foundation for sustainable development.

The deployment of small 5G base stations is expected to become the second growth curve. The company carried out targeted distribution in 2021 and raised 1 billion yuan for R&D base construction projects, 5G small base station equipment R&D and industrialization projects, and supplementary working capital. Currently, the company's 5G small base station project is progressing smoothly. It has successfully obtained a network access test certificate and a model approval certificate issued by the Ministry of Industry and Information Technology, which is already in the marketing stage. 5G small base stations can play an important supplementary role in weak signals and deep fixed-point coverage in blind spots. Since this year, the three major operators have begun collecting 5G small base stations. According to Dell'Oro's forecast data, the global small base station market will reach 25 billion US dollars in the next 5 years, and the market space is broad. The company has accumulated more than ten years of R&D experience in the field of broadband mobile communications, completed relevant technical preliminary research in the field of 5G public and private networks, has the advantage of technology research and development to localize 5G small base stations, and has rich experience in the industrialization of communication equipment projects. It is expected to expand business boundaries in the field of 5G small base stations and create the company's second growth curve.

Investment advice

The estimated revenue for 2022-2024 is 878 million yuan, 1,072 million yuan, 1,311 million yuan, net profit of 304 million yuan, 379 million yuan, 471 million yuan, EPS is 0.48 yuan, 0.60 yuan, 0.75 yuan, and corresponding PE is 23 times, 18 times, and 15 times. We are optimistic about the company's future performance, and for the first time it covers a “recommended” rating.

Risk warning:

Military spending fell short of expectations; the military informatization construction process fell short of expectations; repeated epidemics; and the pace of order delivery was adjusted.