(Report Producer/Analyst: Guotai Junan Securities, Peng Lei, Yang Tianhao)
1. Weapon navigation and control leader, focusing on the main business to achieve high-quality development
1.1. The company is a core enterprise focusing on the field of navigation control
The company takes "navigation control and ammunition information technology" as its main business, and is a national key military protection enterprise.
The company is located in Yizhuang Economic and Technological Development Zone, Beijing, and is committed to guidance control, navigation control, detection control, environmental control, stability control, satellite and ground communication, military connectors and other fields.
The company was founded in 1960 and listed its military assets as a whole in 2008.
The predecessor of the company was founded in 1960, and in September 2000, the separation of military and civilian was implemented, and a holding civilian company was established, North Sky Bird (successfully listed in 2003).
In November 2001, the company was restructured into a wholly state-owned company, North China Optics, and the investor was China North Industries Group.
In 2008, with the support of the Ordnance Group and the Bureau of Science, Technology and Industry for National Defense, North China Optics incorporated all military assets into North Sky Bird to complete the overall listing of military assets, and North Sky Bird was renamed China Bing Optoelectronics.
In April 2012, in accordance with the adjustment of the industrial structure of the Ordnance Group, Zhongbing Optoelectronics changed its name to "Northern Navigation and Control Technology Co., Ltd."
Ordnance Industry Group holds 38.72% of the shares, and its subsidiaries are involved in military communications, electrical connectors and other fields.
Ordnance Industry Group holds a total of 38.72% of the company's shares through North Navigation Technology Group and China Bing Investment. Northern Navigation Technology Group directly holds 22.65% of the company's shares and is the company's largest shareholder.
The company has three specialized subsidiaries: 1) subsidiary Zhongbing Communications, which is mainly engaged in ultra-short-wave communication equipment and missile-borne data links, etc.; 2) Subsidiary Zhongbing Aviation Alliance, which is mainly engaged in various categories of electrical connectors and wiring harness components; 3) Subsidiary Hengyang Electronics, which is mainly engaged in electronic boxes, petroleum online instruments, valve positioners, etc.
1.2. Equity incentive + focus on the main business to help the company's high-quality development
In 2020, the company issued an equity incentive plan, granting 29,592,200 stock options to 108 people, including the company's directors, senior management and core personnel, at an exercise price of 8.54 yuan per share.
According to the company's announcement, the equity incentive will enter the first exercise period from December 30, 2022, with a total of 94 incentive recipients who meet the exercise conditions, and the number of exercisable rights is 10,254,768.
The equity incentive plan is conducive to deeply binding the interests of shareholders, management and employees, and injecting growth vitality into the company's medium and long-term development.
Divest loss-making businesses and focus on the main business to move forward lightly.
Harbin Jiancheng North Special Vehicle Co., Ltd., an atomic company, is mainly engaged in special vehicles, pressure vessels (Class III low and medium pressure vessels, automobile tank cars), chemical equipment and other businesses, which have continued to lose money in recent years.
In 2019, 2020, and 2021Q3, the net profit of the Northern Special Vehicle Company was -1.3035 million yuan, -47.99 million yuan, and -24.8184 million yuan, respectively, and the military outsourcing business relying on the Aviation Bomb Institute became its only business that achieved revenue growth.
In 2022, the company transferred 51% of the equity of the Northern Special Vehicle Company to the Aviation Bomb Institute and 49% of the equity to the Navigation Group. After divesting the loss-making business, the company is expected to travel lightly and continue to improve its operation and management capabilities.
Improve the incentive mechanism of human efficiency, and the inflection point of performance release has arrived. The company's revenue in the first three quarters of 2023 was 2.398 billion yuan, a year-on-year decrease of 16%, mainly due to the decrease in operating income of dual-use products compared with the same period last year, and the net profit attributable to the parent company was 185 million yuan, a year-on-year increase of 19%.
We believe that the company implements the incentive method for employees' innovation contributions, systematically promotes the construction of intelligent production lines and information platforms, and after divesting loss-making businesses, the inflection point of performance release has arrived, and it is expected to accelerate growth in the future.
During the period, the expense ratio continued to decline, and the net profit level was relatively stable.
The company's expense ratio has shown an overall downward trend in the past five years, and the management expense ratio in the first three quarters of 2023 has decreased by about 4% compared with 2018.
The company continues to emphasize R&D investment, strengthens original and leading technology research, and actively promotes the deepening demonstration of a new generation of equipment system, and the R&D expense rate has been maintained at 5%-6% for a long time.
In terms of profitability, after divesting loss-making businesses in 2022, the company's gross profit and net profit levels continued to recover, and the net profit margin in the first three quarters of 2023 was about 9%, a five-year high, and is expected to further improve in the future.
Contract liabilities remained stable and receivables increased.
In the past three years, the company's contract liability level has remained stable as a whole, and the proportion of receivables in revenue has continued to increase, reflecting the continued strong downstream demand. In the first three quarters of 2023, the scale of the company's receivables has increased, mainly due to the fact that some payments have not been recovered for the time being, and combined with the payment rhythm of the military industry, it is expected that the company's payment collection situation will improve in the fourth quarter.
2. There is a vast space for internal and external demand, and precision-guided weapons continue to boom
2.1. The consumption attribute drives a surge in demand, and the combat effect of precision-guided weapons is outstanding
Rocket artillery has a good combat effect and is less expensive than missiles.
In a number of local wars in recent years, the actual combat effect of rocket artillery is obviously better than that of traditional artillery. According to the magazine "Weapons Knowledge" "Vulcan Pouring "Steel Rain": US M270 Multiple Launch Rocket System", the actual combat effect of one M270 multiple rocket launcher of the US military in the Gulf War was equivalent to 33 155mm howitzers.
In precision-guided weapons, rockets are less expensive and more lethal than missiles. According to the FY2024 Budget Request Overview Book disclosed by the U.S. Department of Defense, the unit price of GMLRS rockets purchased by the U.S. military in 2022/2023/2024 is $15.65/22.5/$202,800 per piece, which is two-thirds of the Joint Air-to-Surface Missile (JAGM).
ACCORDING TO XINHUA, THE JOINT AIR-TO-SURFACE MISSILE WEIGHS 49 KILOGRAMS AND HAS A RANGE OF 8 KILOMETERS, AND ACCORDING TO LOCKHEED MARTIN'S OFFICIAL WEBSITE, THE GMLRS ROCKET WARHEAD IS ABOUT 200 POUNDS (ABOUT 90 KILOGRAMS) AND HAS AN EXTENDED RANGE OF 150 KILOMETERS.
The consumption of precision-guided munitions in modern warfare is enormous.
Precision-guided weapons are consumables that are consumed at an alarming rate in modern warfare. According to the magazine "Weapons Knowledge" "Vulcan Pouring "Steel Rain": American M270 Multiple Launch Rocket System", in the "Desert Sabre" operation, the US military's 189 M270s fired a total of more than 17,000 rockets in 100 hours, with an average of 1 rocket per hour per gun.
According to the global network, a research report by the Michel Space Research Institute, a think tank of the US Air Force, shows that if a high-intensity conflict breaks out between the United States and opponents of the same level as China and Russia, the US military's 6,500 AGM-158 series missiles will only be enough for 8 days to consume.
The U.S. military has stepped up its procurement of precision-guided weapons, and is expected to purchase no less than 18,000 GMLRS rockets by 2027.
According to the FY 2024 defense budget disclosed by the U.S. Department of Defense, missile and ammunition purchases for FY 2017-2024 increased from $1.39 billion to $3.06 billion (CAGR12%).
In fiscal year 2024, tactical and strategic missile purchases amounted to $24.4 billion, up nearly 30 percent from $18.8 billion in 2023.
The GMLRS guided rocket is a supporting ammunition for the US military's active rocket artillery MLRS M270 and M124 HIMARS.
ACCORDING TO LOCKHEED MARTIN'S OFFICIAL WEBSITE, MORE THAN 60,000 PIECES OF THE MUNITION HAVE BEEN PRODUCED SO FAR.
In addition, according to the long-term procurement contract for GMLRS rockets in fiscal year 2024 disclosed by the US Department of Defense, the United States plans to purchase no less than 18,000 GMLRS by 2027.
2.2. Domestic demand is superimposed on foreign trade to open up space, and low-cost and high-performance weapons are highly valued
Russia's invasion of Ukraine has further highlighted the need to increase stockpiles of precision-guided munitions. Precision-guided munitions are one of the most important weapons in modern warfare and one of the country's most important strategic reserves.
"Analysis and Enlightenment of the Combat Use of Aviation Munitions in the Russia-Ukraine Conflict" points out that the production and storage of precision strike weapons is the key to winning a large-scale war, and it is necessary to increase the strategic reserve of precision-guided munitions and seize the high ground of fire suppression.
Attention should be paid to the development and equipment of low-cost long-range strike munitions, such as low-cost cruise missiles and long-range rockets, and the proportion of precision-guided munitions in the ammunition and equipment of the Aerospace Forces should be increased. Use low-cost aviation ammunition to hit high-value targets and improve the cost-effectiveness ratio.
The international arms trade market has picked up, and the volume of trade in precision-guided weapons has increased sharply. Since the Russia-Ukraine conflict, the global security environment has continued to deteriorate, and the precision-guided weapons trading market has picked up. According to the Stockholm International Peace Research Institute (SIPRI), the global arms trade volume of missiles and weapons in 2022 increased by 63% year-on-year compared with 2021, the highest in nearly a decade.
To meet the national defense needs of small and medium-sized countries, rocket artillery is a star product in the military trade. As far as small and medium-sized countries are concerned, there is redundancy in the range of missiles, and the deterrent power of artillery is insufficient; rocket artillery not only has a high cost-effectiveness ratio, but also has a range between artillery and missiles, which can well meet the national defense needs of small and medium-sized countries, and is a star product in the international arms trade market.
According to SIPRI data, continental rocket artillery has been exported to many countries, and on February 9, 2020, China North Industries Corporation SR-5 multiple rocket launchers were unveiled at the UAE Armed Forces military parade.
3. The industry position has obvious advantages, and fully benefits from the accelerated volume of models
3.1. The guidance and control system is the key component, and the company is at the core of the industrial chain
The guidance control system is the core component of the missile, accounting for 20%-40% of the value of the missile. A missile is a kind of aircraft that carries a warhead, relies on its own power plant to propulse, and is guided by a guidance system to control the flight track, guide the target and destroy the target.
The main structure of the missile includes components such as the seeker, power system, missile body and warhead. The guidance and control system is the core component of the missile, which is responsible for detecting the target and correcting the flight trajectory of the missile, and guiding the missile to achieve precision strikes.
According to the "Research on the Reduction of Missile Weapons", the guidance and control system can account for more than 40% of the missile cost of some advanced missiles in service, such as PAC-3 and THAAD, which account for 47% and 43% respectively, and the proportion of ballistic missiles is relatively low, about 20%-30%.
Precision-guided weapons such as rockets generally use inertial navigation.
"The Impact of Electromagnetic Interference on Long-Range Guided Rockets and Its Countermeasures" pointed out that the long-range rockets, which are the backbone equipment of the fourth generation of firepower strikes of our army, adopt the "strapdown inertial navigation + satellite" integrated navigation technology, and its shooting accuracy is greatly improved compared with the previous simple control rockets, and the circular probability error can reach tens of meters or several meters at a range of hundreds of kilometers.
According to LOCKHEED MARTIN, the GMLRS rockets and the next-generation PrSM tactical missiles used in the main rocket launchers HIMARS and M270 in the U.S. military also use the composite guidance method of inertial navigation + GPS.
The inertial navigation system has the advantages of good concealment, all-weather operation, and no dependence on external support.
The inertial navigation system is a solution system that uses a gyroscope to measure angular velocity and an accelerometer to measure line acceleration as sensitive elements, establishes a navigation coordinate system according to the output of the gyroscope, and calculates the real-time speed, position, heading, attitude and other navigation parameters of the carrier according to the output of the accelerometer and combined with the initial motion state.
Inertial navigation does not require any external information, nor does it radiate any information outward, and only relies on the inertial navigation system itself to carry out three-dimensional positioning and three-dimensional orientation in real time autonomously and covertly in the global and any medium environment under all-weather conditions. It has the advantages of good concealment, not affected by external electromagnetic interference, and can work all-weather, global and full-time.
The company is a secondary supplier of ordnance inertial navigation system, and its industrial chain position has obvious advantages.
The supply side of the inertial navigation industry chain is mainly divided into three levels: device manufacturing, module assembly, software design, and system integration. The upstream of the industrial chain mainly includes electronic components, inertial devices and other reference information equipment; the middle of the industrial chain mainly includes information acquisition and processing modules, measurement unit modules and satellite attitude measurement modules, as well as system integration and software design for each module; the downstream of the industrial chain is the demand side, including major end customers in the military and civilian fields. The company is a second-level supporting supplier of the industrial chain, responsible for the R&D and production of the control warehouse.
3.2. The subsidiary, Zhongbing Communications, is a leading enterprise in ultra-shortwave communications in our army
Zhongbing Communication, a subsidiary, is a large-scale electronic industry enterprise specializing in the production of military communication products.
The military products produced by the company are widely used in the continental army, navy, air force, rocket force, strategic support forces and other military branches, as well as aviation, aerospace, navigation and other fields.
According to the public offering prospectus of Zhongbing Communications, the company's products have been officially installed in the army, based on the dependence of military customers on the company for subsequent product upgrades, technical improvements and spare parts procurement, the company will maintain a relatively advantageous position for a certain period of time.
Revenue was relatively stable, and net profit declined.
The overall level of the company's operating income has not changed much, and it will decline in 2022, mainly due to the delay in orders due to the epidemic. The rapid growth of net profit in 2020 was due to the increase in non-recurring income of 55.074 million yuan from the disposal of assets, which decreased since then. In the first half of 2023, the company's net profit decreased by 64% year-on-year, mainly due to the change in product structure and the increase in operating costs by 18.35% compared with the previous period, as well as the increase in expenses during the period.
In 2022, the gross profit level rebounded, and the R&D expense ratio continued to increase.
From 2017 to 2021, the company's gross profit margin decreased year by year, and rebounded in 2022. The price of the company's products is mainly affected by the price factors approved by the military, due to the large difference in gross profit of products, the increase in the proportion of products with lower gross profit in the structure will drive the company's overall gross profit margin down.
In the first half of 2023, the company's expense ratio increased, of which the R&D expense ratio reached 25%, a new high in the past five years, the management expenses increased by 1.8474 million yuan due to the adjustment of employee wages, and the tax and surcharge increased by 2.001 million yuan compared with the previous period due to the adjustment of national tax policies.
3.3. The subsidiary, China Bing Aviation Alliance, is an important supplier of military electrical connectors
The subsidiary Zhongbing Aviation Federation is mainly engaged in the research and development, production and sales of electrical connectors, wiring harnesses and other connection system products, which are widely used in aviation, aerospace, communications, ships, weapons, railways, machine tools, automobiles, medical equipment and other fields, among which in the field of communication are mainly used in wireless base station systems, microwave transmission systems, optical transmission systems, data access systems, etc., in the military field are mainly used in radar, individual communication systems, etc., in the industrial field are mainly used in industrial equipment, solar energy, Wind energy, etc., is mainly used in traditional wiring harnesses and new energy vehicle wiring harnesses in the automotive field.
In the first half of 2023, revenue growth declined, and net profit recovered. From 2017 to 2021, the company's operating income grew rapidly, while the net profit remained relatively stable, and the revenue continued to decline from 2022 onwards, due to the macroeconomic situation and the decrease in sales unit price, resulting in a year-on-year decline in operating income. Net profit rebounded in the first half of 2023.
In the first half of 2023, the net profit margin reached a record high, and the R&D investment continued to be emphasized. The company's gross profit margin has remained at about 52% in the past five years, and the net profit margin has increased to 17% in the first half of 2023, a new high in five years. The company continued to increase its R&D efforts, and the R&D expense rate reached 6% in the first half of 2023, mainly due to the company's expansion of the R&D team and the improvement of the R&D team personnel.
4. Earnings forecasts and valuations
4.1. Profit Forecasts
Based on the analysis of the company's various businesses and the research on the downstream demand for military and civilian products, we believe that the company will divest its loss-making business and benefit from the strong demand for downstream precision-guided munitions, and its performance is expected to exceed expectations.
Our basic assumptions for the Company's future performance forecast are as follows:
During the 14th Five-Year Plan period, the downstream of military products was booming, and the company's military products business continued to benefit;
The subsidiary benefited from the structural benefits of national defense informatization construction and aerospace, and its performance continued to grow.
The demand for precision-guided munitions has increased, and the company has fully benefited as a second-level supporting leader in the industrial chain.
The military trade market of precision-guided munitions has picked up, and the export potential of the company's downstream products has increased.
By Product Structure:
1) We expect the company's headquarters to benefit from the increase in demand for precision-guided munitions, with revenue of 3.325 billion yuan, 4.59 billion yuan, and 6.269 billion yuan from 2023 to 2025, respectively, a year-on-year increase of 23%, 38%, and 37%.
2) The subsidiary, Zhongbing Communications, has benefited from the increase in demand for national defense informatization, and its revenue is expected to be 639 million yuan, 767 million yuan, and 920 million yuan from 2023 to 2025, respectively, a year-on-year increase of 20%, 20%, and 20%.
3) The 14th Five-Year Plan is booming in aerospace, and the downstream continues to increase the demand for components such as upstream connectors, and it is estimated that the revenue of the subsidiary Zhongbing Aviation Union from 2023 to 2025 will be 405 million yuan, 465 million yuan, and 535 million yuan respectively, a year-on-year increase of 15%, 15%, and 15%.
4) The growth rate is expected to remain stable with revenue of 305 million yuan, 466 million yuan and 440 million yuan respectively from 2023 to 2025, a year-on-year increase of 20%, 20% and 20%.
To sum up, it is estimated that the company's revenue from 2023 to 2025 will be 4.663 billion yuan, 6.176 billion yuan, and 8.149 billion yuan respectively, a year-on-year increase of 21%, 32%, and 32%, and the net profit attributable to the parent company is expected to be 242 million yuan, 371 million yuan, and 515 million yuan from 2023 to 2025, respectively, a year-on-year increase of 31%, 53%, and 39%, and the corresponding EPS will be 0.16/0.25/0.34 yuan.
4.2. Valuation Analysis
Based on FCFF/WACC valuation: Give the company's stock a reasonable valuation of $19.75.
Key assumptions are based on:
(1) Risk-free rate: 2.49% of the five-year Treasury bond yield (December 18, 2023);
(2) Equity risk premium: take 6.63% of the average annualized yield of the 5-year (December 19, 2018 to December 19, 2023) Wande Military Index, Military Index, Military Core Index, Top Ten Military Group Index, CSI Military Total Return Index, Aerospace Military Index and the yield of five-year treasury bonds.
(3) Beta: We use the Wind beta calculator and arrive at a beta of 0.8441.
(4) Pre-tax debt cost: Reference 5-year LPR interest rate of 4.2%.
(5) Debt ratio D/(D+E): Assuming that the company's future asset-liability ratio D/(D+E) is 0.5%.
(6) Income tax rate: The effective income tax rate of the reference company in the past three years is 12%.
(7) Sustainable growth rate: The company is mainly for guided weapons supporting guidance control bins, guided weapons for consumables, considering the "14th Five-Year Plan" since the increase in the intensity of our army's actual combat exercises, ammunition consumption is expected to continue to rise, assuming that the company has a positive sustainable growth rate of 2% in the future
PE-based valuation: Select AutoNavi Infrared, BDStar, and Changyingtong, which are comparable companies in the navigation industry chain, and give the target price according to the PE valuation method.
The current average PE of the industry in 2023 is 56 times, considering that the company's supporting level is higher than that of comparable companies and occupies the vast majority of the market share in the industry, with reference to BDStar with higher PE among comparable companies, the company is given 70 times PE in 2023, corresponding to a reasonable valuation of 11.34 yuan.
Based on the two valuation methods of FCFF/WACC and PE, we give the company a target price of $15.53.
4.3. Summary of Reports
Northern Navigation first coverage report, target price of 15.53 yuan, space 38%.
The market believes that the ammunition industry is a traditional industry, and the company's downstream demand is stable, but we believe that the consumption rate of ammunition in modern warfare is amazing, and the demand for high-efficiency ammunition such as rockets is expected to increase beyond expectations.
The company is the leading supplier of inertial navigation control chambers for precision-guided munitions in mainland China, and its performance is expected to continue to grow at a high rate. EPS for 2023-25 is expected to be $0.16/0.25/$0.34, giving a target price of $15.53.
5. Risk Warning
1) The risk of downstream collection
In the past three years, the proportion of the company's receivables in operating income has continued to increase, considering that the payment rhythm of military products is relatively concentrated, downstream customers may face payment pressure, which ultimately leads to the risk of collection of the company's receivables.
2) The risk that downstream demand is less than expected
A large proportion of the company's downstream military customers come from military industrial groups, the end user is the military, and the planning attribute is strong, and there is the possibility of frequent changes in order rhythm and product demand, which ultimately affects the company's revenue recognition rhythm.
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The report comes from [Foresight Think Tank]