Hagrid Communications's 2Q23 performance is in line with our expectations
Hagrid Communications announced its semi-annual report for 2023. The company 1H23 achieved operating income of 2,877 million yuan, an increase of 15.8% over the previous year; realized net profit of 311 million yuan, an increase of 6.8% over the previous year; achieved net profit of 252 million yuan after deducting non-return net profit of 252 million yuan, an increase of 7.6% over the previous year. Corresponding to the 2Q23 single quarter, the company achieved operating income of 1,843 million yuan, an increase of 19.2% over the previous year; realized net profit of 269 million yuan, an increase of 12.5% over the previous year; and achieved net profit of 240 million yuan after deducting non-return net profit of 240 million yuan, an increase of 16.8% over the previous year. The company's performance is in line with our expectations.
Financial concerns: 1) Gross margin declined year over year. The company's 2Q23 gross margin fell 4.0 ppt to 35.0% year on year. We believe this was mainly due to small-batch delivery of new products. Along with the volume of new products released, the gross margin level is expected to rise in the second half of the year. 2) Appropriate cost control during the period. The company's expense ratio increased by 2.0ppt to 19.2% year-on-year during the 2Q23 period. Expense-side optimization reduced the decline in the company's net interest rate (0.9 ppt year-on-year decline), and the net interest rate due to deductions remained basically stable.
Development trends
New product delivery and product replacement drive the company's business growth. 1) Wireless Communications: Benefiting from new contracts and increased product delivery in this sector, the wireless communications business 1H23 achieved revenue of 1,320 billion yuan, an increase of 37.5% over the previous year; gross margin was 45.4%, a year-on-year decline of 6.6 ppt. Currently, the company's next-generation main shortwave, ultra-high frequency products, and Tiantong-1 products have achieved breakthroughs in new platforms. We believe that benefiting from the delivery of new products, the volume of wireless communication business is expected to continue to grow in 2023. 2) Beidou Navigation: This section is in the stage of replacing old and new models. The loading rate of Beidou-2 is close to saturation, and downstream demand is weak. Beidou Navigation Business 1H23 achieved revenue of 110 million yuan, down 53.0% year on year; gross margin was 45.2%, down 15.3 ppt year on year. The company already has “chips, modules, antennas, terminals, systems, and operations” around Beidou-3
All aspects of technology, and the terminal has already entered the certification and batch order stage. We believe it is expected to fully benefit from the full deployment stage of Beidou-3. 3) Aerospace: 1H23 achieved revenue of 135 million yuan, up 26.9% year on year; gross margin was 43.2%, down 10.2 ppt year on year. 4) Digital intelligence ecosystem: 1H23 achieved revenue of 1,266 billion yuan, an increase of 10.1% over the previous year; gross margin was 17.9%, a year-on-year decrease of 0.8 ppt.
Increase the layout of emerging fields in line with the development trend of the industry. The company issued a targeted expansion plan, and plans to raise no more than 1,855 billion yuan to invest in the industrialization of “Beidou+5G” integrated R&D, unmanned information industrialization projects, and the Tianshu R&D Center. We believe that this fixed increase is expected to help the company lay out emerging fields such as integrated communication and navigation systems, unmanned systems, and satellite Internet ahead of schedule, improve general chip technology capabilities in the communications field, and adapt to the development trend of national defense informatization, unmanned, and three-dimensional development.
Profit forecasting and valuation
Considering the delayed pace of product delivery and the expected increase in cost rate levels due to the layout of emerging fields, we lowered our profit forecast for 2023 by 18% to 750 million yuan, and introduced the 2024 profit forecast of 850 million yuan for the first time. The current stock price corresponds to 31 times and 27 times P/E in 2023 and 2024. We switched the valuation window to 2024 and raised the target price by 10% to 11.1 yuan based on a 30-fold P/E multiplier. There is still room for a 12% increase from the current stock price, maintaining an outperforming industry rating.
risks
The commercial implementation of Beidou Navigation fell short of expectations, and there is uncertainty about the pace of customer procurement.