Incidents:

The company announced its 2023 and 2024Q1 results. According to the company's announcement, revenue in 2023 was 3,567 billion yuan (yoy +3.08%), net profit attributable to mother was 606 million yuan (yoy +16.47%), and net profit after deducting non-return to mother was 571 million yuan (yoy +13.94%). 2024Q1 achieved revenue of 693 million yuan (yoy -0.62%) and net profit to mother of 121 million yuan (yoy +4.22%). The 2023 and 2024Q1 results are in line with market expectations.

Comment:

Downstream military and civilian demand continued to be released, and revenue remained stable year over year. According to the company announcement, the company's overall revenue remained stable. According to our analysis, 1) By product, T/R components and RF modules achieved revenue of 3.379 billion yuan (yoy +7.64%) in 2023, and RF chips achieved revenue of 128 million yuan (yoy -52.98%). Our analysis believes that benefiting from the stable and superimposed downstream military demand and the recovery of radio frequency business in civilian base stations, the T/R component and RF module business achieved steady growth, and the decline in RF chip revenue was mainly due to the company's product restructuring. 2) On a quarterly basis, 2024Q1 continues the trend of the first quarter of previous years and remains stable overall. We expect the company's revenue to continue to increase steadily in 2024 as downstream orders continue to be placed, military demand continues to rise, and the civilian market continues to expand.

Profitability continues to improve, driving steady growth in performance. According to the company's announcement, the company's gross margin for 2023 was 32.28%, up 1.61 pcts from the same period last year, and the net profit margin was 17.00%, up 1.96 pcts from the same period last year. The 2024Q1 gross margin was 35.63%, up 3.88 pcts from the same period last year, and the net margin was 17.42%, up 0.81 pcts from the same period last year. According to our analysis, 1) The company's gross margin has shown a continuous upward trend since it bottomed out in 2022/Q4, mainly due to the gradual release of production capacity and the continuous increase in superimposed scale effects, and it is expected that the upward trend will continue in the future. 2) The increase in the company's net interest rate is mainly due to cost reduction and efficiency, and the continuous deepening of the profitability of superimposed products. We expect that as the scale effect of the company continues to increase, the company's profitability is expected to continue to improve to drive steady growth in performance.

Backed by CLP 55, the military and civilian sectors have driven steady growth in performance. 1) The company is backed by CLP 55 and is a core domestic RF and T/R component company with a deep technical background; 2) The company's military and civilian dual-line layout, the military T/R component business is expected to benefit from increased penetration rate of phased array radars, and the civilian RF business is expected to unleash rapid growth along with 5G base station construction and demand for RF components in mobile phone terminals; 3) The company has formed an industrial chain layout from chips to modules and components. The future will fully benefit from the release of external demand, and the company's performance is expected to continue to grow rapidly.

The 2024E profit forecast was lowered and the “Overweight” rating was maintained. Considering some product restructuring and the impact of fluctuations in downstream demand, we lowered the 2024E net profit forecast to mother of 707 million yuan (previous value was 882 million yuan), and added the 2025-2026E net profit forecast of 8.69/1,106 million yuan. The PE corresponding to the current stock price is 42/34/27 times, respectively.

Comparing representative companies such as Zhenlei Technology (RF chips), Chengchang Technology (T/R chips), and Zhuo Shengwei (RF devices/modules) whose main business is RF related products, the average PE values of comparable companies in 2024-2026E were 57/41/29 times, respectively. The company's 2024E PE valuation was lower than the industry average. Considering that the company is a leading RF and T/R component company, the core benefits from increased demand from the military and civilian markets, and the continuous increase in combined profitability, it maintains an “increase” rating.

Risk warning: risk of changes in product sales prices; risk of changes in military order expectations; increased risk of industry competition.