Event: the company released its 2020 annual report on March 27th. The company realized revenue of 515 million yuan (+ 4.09%), net profit of 678 million yuan (+ 590.73%), net profit of 74.4124 million yuan (+ 47.61%), gross margin of 38.65% (+ 6.52pcts), net profit of 134.04% (+ 112.18pcts) and basic earnings per share of 1.53 yuan (+ 595.45%).

Main points of investment:

Firm strategic transformation, concentrate resources on military industry: Ganhua Science and Technology Industry, formerly known as Guangdong Ganhua, was founded, the main business is to engage in LED industry, biochemical industry and sugar paper trade business. In the process of development, with the intensification of competition in the LED industry, ① listed and sold its subsidiary Deli Optoelectronics (LED business main body) on February 11, 2018, and withdrew from the LED industry. In terms of ② paper trading business, under the influence of macro-economy, the paper industry is in the transition period of eliminating production capacity and adjusting structure, showing a low operating trend. The domestic consumption demand for paper products is weak, and the paper market has been basically saturated. The company ended paper trade and withdrew from the paper industry in the second half of 2017. As for the ③ biochemical industry, the company stopped the production of the biological center and withdrew from the biochemical industry at the end of May 2018 because the company could not meet the steam needed for production and the production cost rose sharply. The company began to make a firm transformation in 2018. On the basis of retaining the sugar trading business, ① gradually made efforts around military industry, new materials and high-end manufacturing. ① acquired 70% of Shenyang Haneng: the company successively acquired 45% of Shenyang Haneng Metal Materials Co., Ltd. at a price of 184 million on September 13, 2018, and 25% of Shenyang Haneng at a price of 102 million on March 7, 2019. Shenyang Hanneng mainly undertakes the research, development and manufacture of various specifications of tungsten alloy prefabricated fragments, and the products are mainly used in the field of national defense science and technology, and can be used for projectiles and arrows equipped by sea, land, air, rockets, strategic support and other multi-force equipment. it has a relatively stable competitive position in the field of tungsten alloy prefabricated fragments, and is the only or main supplier of prefabricated fragments for some conventional shells and new shells. ② acquires Sichuan sublimation Power supply: on December 6, 2018, the company priced 660 million of Sichuan sublimation Power Technology Co., Ltd., sublimation Power supply uses two categories of products: modular power supply system and customized power supply system, serving airborne, shipborne, missile-borne and other weapon platforms. The main customers include domestic well-known military enterprises, military research institutes, military factories and so on. Strategic investment in ③ Semiconductor: in September and October 2020, after acquiring and increasing its equity with its own funds, the company holds a total of 20.06% of Semiconductor, which has a strong R & D team and rich industrial resources in the field of power semiconductors and analog integrated circuit design. The developed SiC power devices have been successfully industrialized, the market scale of the company is large, and the development trend continues to improve in the future. Through the implementation of strategic investment in Deweit, it is expected to have a positive synergistic effect on the technology, R & D work of the company's power supply plate, accelerate the pace of localization of the company's core components, and effectively enhance the competitiveness of products.

After several divestitures and mergers and acquisitions, the company has formed an industrial pattern of three major business sectors: ① military power supply, ② ammunition parts and ③ sugar trade.

In 2020, the company realized revenue of 515 million yuan (+ 4.09%), net profit of 678 million yuan (+ 590.73%), and net profit of 74.4124 million yuan (+ 47.61%). The company's net profit is higher than that of the company mainly due to the completion of the listing and sale of 248mu of "three old" reconstruction land, resulting in non-recurrent income.

Financial data split: ① military power supply maintains rapid growth, and gross profit margin remains high: in 2020, power supply and related products rely on sublimation power supply, a wholly-owned subsidiary, with revenue of 161 million (+ 38.49%), accounting for 31.18%, net profit of 68.6199 million, gross profit of 84.03% (+ 3.76pcts) of military power products, and power business profitability continues to maintain a high level. The income of ② ammunition parts business declined slightly, and the gross profit margin continued to rise: in 2020, the company's tungsten alloy prefabricated fragment business depended on its subsidiary Shenyang Haneng, with plate revenue of 117 million (- 2.38%), accounting for 22.82%, and gross profit margin of 48.73% (+ 5.10pcts). The profit space of ③ sugar products business is under pressure due to the impact of the industry cycle: in 2020, the revenue of traditional sugar products is 228 million (- 5.63%), accounting for 44.29%, and the gross profit margin is 0.14% (- 1.56pcts). Affected by the cyclical fluctuations of the sugar industry, the profit space of sugar mills is under pressure.

The cost side increases rapidly, and the R & D efforts are strengthened: the company's management expenses in 2020 are 59.7159 million (+ 32.87%), which is mainly due to the increase in customer development this year, the increase in sales business, and the increase in business expenses; sales expenses are 24.6469 million (+ 147.69%). Mainly due to the increase in employee salaries and stub scrapping; financial expenses 952.26 (- 14.16%), mainly due to the repayment of bank loans In 2020, according to the strategic goal of industrial transformation, in order to improve the core competitiveness of military business, the company increased its R & D investment in military power and ammunition parts, with R & D investment of 32.1611 million (+ 51.6%) in 2020, 90 R & D personnel (+ 32.68%), accounting for 6.25% (+ 1.97pcts).

Military industry main body performance commitment successfully completed: ① sublimation power supply: according to the performance bet agreement, the net profit of sublimation power supply in 2018 is not less than 40 million yuan, the cumulative net profit in 2018 and 2019 is not less than 90 million yuan, and the cumulative net profit in 2018, 2019 and 2020 is not less than 150 million yuan. Judging from the actual completion, the net profits attributed to the shareholders of the parent company in 2018,2019 and 2020 are-26.504 million yuan, 51.4775 million yuan and 72.1232 million yuan respectively. The net profits of sublimation power belonging to the shareholders of the parent company after deducting non-recurring profits and losses and excluding the impact of a certain amount of losses of the R & D company stipulated in the underlying Asset performance commitment compensation Agreement are 43.2747 million yuan, 52.2627 million yuan and 70.0153 million yuan respectively, the cumulative performance commitment has been completed. ② Shenyang Haneng: according to the performance bet agreement, the net profit deducted by Shenyang Haneng from 2018 to 2020 is 28 million yuan, 32 million yuan and 40 million yuan respectively. From the actual completion, the net profit from 2018 to 2020 has been 28.7472 million yuan, 33.4043 million yuan and 4091.12 million yuan.

① military power business: benefit from the increase in the types of aviation, warship, radar, missiles and other weapon systems, the improvement of localization, and the huge demand in the field of military power supply.

The company's military power supply business relies on the subsidiary sublimation power supply, and the product structure of the two major business areas is divided into two categories: ① module power supply (general module power supply, special application module power supply, high-power module power supply) and ② custom power supply system (AD-DC power supply, DC-DC power supply, power supply system). Sublimation power products are mainly used in aircraft, missiles, ships and other weapons and equipment, the product features "small batch, customization. Multiple batches ". The application of power industry in aviation, aerospace and military industry is in the stage of rapid development, the requirements for power products in aerospace and military industry are more stringent, and the technical content and added value of the products are higher than those in other industries, therefore, it has attracted many foreign power suppliers.

However, at present, the high-end market is mainly occupied by power products such as VICOR and Interpoint in the United States, which are widely used in the military field. Under the background of military industry informatization and localization, if Chinese power supply enterprises can provide high-quality power products to replace foreign products, it will reduce the dependence of China's military products on foreign manufacturers and enhance the profitability of military enterprises while ensuring national defense security. We believe that since its establishment, sublimation has been committed to the research, development, production and sales of high-efficiency, high-reliability and high-power-density power products. It has built a power product line with high reliability, stable quality, advanced technology, a wide range of applications, complete specifications, high efficiency, wide range and multi-output, and has a certain import substitution ability.

② ammunition parts business (tungsten alloy prefabricated fragments): missile "consumption" attribute, industrial chain blowout Shenyang can mainly undertake various specifications of tungsten alloy prefabricated fragments research and development and manufacturing, product series covers tungsten column, tungsten ring, tungsten ball, etc., characterized by high density, high tensile strength, high elastic modulus, low thermal expansion coefficient and good thermal conductivity, electrical conductivity, etc., mainly used in the field of national defense science and technology. For sea, land, air, rockets, strategic support and other multi-force equipment of artillery, rocket and missile products. From the point of view of demand: specific to China's missile market, its demand is mainly affected by the demand for national defense and the export demand of military trade. in terms of national defense demand, under the background of comprehensively strengthening military training and preparation and increasing actual combat exercises, missiles are indispensable consumptive weapons and equipment in the modern army, and their demand is expected to maintain a steady and sustained growth along with the steady growth of equipment costs in our country. In terms of export demand for arms trade, missile weapons have always been an important part of the international arms trade market because of their outstanding characteristics different from general offensive weapons, including high power, long range and high accuracy. with the increase of uncertainties in the international situation, transactions in the global arms trade market will be further improved and consolidated in the future, and the popularity of the global missile trading market is expected to recover again. We believe that the company's ammunition parts benefit from the army's preparation for war, and a large amount of missiles and shells are consumed, which is expected to grow rapidly with the surge in missile demand, showing an upsurge in prosperity.

Investment suggestion

We believe that since 2018, the company has made a firm transformation around the military industry, new materials and high-end manufacturing fields. at present, the logic of the company's industrial development is relatively clear, and the proportion of military business income continues to rise. military power (benefiting from the improvement of the localization rate of our weapons and equipment models), ammunition parts (benefiting from military training and preparation, shells, missiles "consumables" attribute drive). At the same time, the company issued a restricted stock incentive plan on March 15, 2021. The number of restricted shares to be granted under this incentive plan is 4.428613 million shares, accounting for about 1% of the company's total share capital of 443 million shares at the time of the announcement of this incentive plan. The price for the first grant of restricted shares is 5.43 yuan per share. For the first time, this incentive plan will not award more than 58 people, including the company's directors, senior managers, middle managers and core backbone. According to the conditions of the equity incentive unlocking sales restriction period, the company will be assessed once a year in the three fiscal years from 2021 to 2023. Based on the main business income in 2020, the growth rate of main business income in 2021 will not be less than 10%. Based on the main business income in 2020, the growth rate of main business income in 2022 will be no less than 25%. Taking the main business income in 2020 as the base, and the growth rate of main business income in 2023 is not less than 50%, we believe that the implementation of equity incentive is based on confidence in the steady development of the company's business in the next few years, on the other hand, we can further establish and improve the company's long-term incentive mechanism, attract and retain talents, and fully mobilize the enthusiasm of the company's directors, senior managers, middle managers and core backbone. Effectively bind the interests of shareholders, the interests of the company and the personal interests of the core team to seek long-term development.

Based on the above point of view, we estimate that the company's operating income from 2021 to 2023 will be 594 million yuan, 687 million yuan and 800 million yuan respectively, the return net profit will be 117 million yuan, 137 million yuan and 165 million yuan respectively, and the EPS will be 0.26,0.31,0.37 yuan respectively. The current share price corresponds to 44.46,37.29,31.24 times PE respectively.

Risk hint: the company's downstream shell, missile customer orders are not as expected, the substitution of military power supply is not as expected, and the risk of high customer concentration downstream of the company.