\u3000\u3 Shengda Resources Co.Ltd(000603) 267 Beijing Yuanliu Hongyuan Electronic Technology Co.Ltd(603267) )
Event overview:
The company released its annual report for 2021, realizing an operating revenue of 2.403 billion yuan, a year-on-year increase of 41.36%; The net profit attributable to the parent company was 827 million yuan, a year-on-year increase of 70.09%; Net profit deducted from non parent company was 812 million yuan, with a year-on-year increase of 72.50%.
Analysis and judgment:
Q: Why did the performance decline month on month in the fourth quarter?
The company achieved a revenue of 523 million yuan in 2021q4, with a year-on-year increase of – 6.49% and a month on month increase of – 16.81%; The net profit attributable to the parent company was 170 million yuan, with a year-on-year increase of + 2.34% and a month on month increase of – 16.12%. We analyze the performance trend of a single quarter. Before the second quarter of 2020, the company’s revenue in the four quarters of previous years was relatively balanced, and there was no particularly obvious seasonal characteristics. Since the second quarter of 2020, due to the influence of many factors, the downstream demand has suddenly increased, the delivery of the company has accelerated, and the performance has erupted since the second quarter of 2020. This round of orders continued until the second quarter of 2021, which also corresponded to the capacity saturation of downstream institutes at that time, and even capacity bottlenecks.
Although Hongyuan has expanded its production capacity in advance, when there was a short-term bottleneck in the production capacity of downstream institutes in the second half of last year, the company’s orders and delivery rhythm were disturbed, which was reflected in the decline in performance. From the current situation, after more than a year of production expansion, downstream customers have solved some bottleneck links of equipment production (such as the expansion of pyrotechnics, warhead and machining), improved equipment production capacity, and started a new round of upstream component procurement.
In the past 8-10 years, Hongyuan has maintained an annualized growth of 20% + when the amount of weapons and equipment has not started to increase. The power mainly comes from the upgrading of weapons and equipment – with the increasing degree of informatization, more and more electronic components are needed. Over the past two years, the company has maintained a growth rate of 50% + mainly based on the improvement achieved by downstream customers on the basis of their original production line, working overtime and making full use of existing production capacity. But this is not the end, because the equipment demand is not enough to rely on the original production capacity, so downstream customers are expanding production one after another. Hongyuan has many customers, and the rhythm and progress of customer expansion are also different. Under the superposition of the original information upgrading and the current continuous expansion of downstream customers, it is very possible for Hongyuan to maintain a relatively high growth in the future.
Second question: why is there so much inventory in the annual report?
According to the annual report, the company’s ending inventory reached 415 million yuan, a significant increase of 93.25% over the beginning of the period. Among them, the inventory of commodities was 214 million yuan, an increase of 106.19% over the beginning of the period; Raw materials amounted to 153 million yuan, an increase of 84.80% over the beginning of the period. We believe that high inventory is mainly to quickly respond to customer demand. At present, the cycle of equipment from pre research to production is shorter than before, and the demand for general electronic components is also “short frequency and fast”. The company will prepare many raw materials and semi-finished products in advance. At the same time, by the end of 2020, part of the production capacity of Suzhou ceramic capacitor production line invested by the company was put into operation, resulting in a year-on-year increase of 137.72% in the production of ceramic capacitors. The output growth rate was much higher than the sales growth, resulting in a significant year-on-year increase of 527.75% in the inventory of ceramic capacitors. However, due to the long product verification cycle of customers, the sales usually lags behind the increase of output, so the ending inventory amount of the company is large.
Third question: can the company continue to grow?
In general, the military industry has rigid demand and weak periodicity. At present, the rapid and large-scale production of new types of fighters and missiles, and the electronization, informatization, intellectualization and localization of weapons and equipment continue to advance. The fundamental factors have not changed, and it is impossible to change in the short term. A new round of production expansion of the industry is about to be completed, and the production capacity will be released to a high level from this year to next year. At present, the company has abundant inventory. With the opening of a new round of large-scale procurement, the company can quickly respond to demand, ensure delivery and quickly release performance. Therefore, we expect that the production and delivery rhythm of the company this year will be similar to that in 2020, that is, it will show a trend of “low before high”, and the annual performance is worth looking forward to. In addition, the company’s downstream customers cover a wide range, and the pace of production expansion is first and then, which will provide a strong guarantee for the continuous growth of the company’s performance.
From an industry perspective, compared with military optoelectronic devices and military chips, the product characteristics of passive components with “low unit price, complex screening and testing and high reliability requirements” have evolved into a stable and balanced enterprise competition pattern. “It’s not difficult to do well, but it’s also difficult to do well” — this is the most favorable field for domestic substitution.
From the perspective of individual companies, Hongyuan’s strategy is more forward-looking. Almost all MLCC enterprises are carrying out horizontal integration or diversified development. Only Hongyuan is deeply engaged in the key fields of MLCC, upstream layout materials (MLCC porcelain, LTCC porcelain, green film belt and electrode slurry), downstream development of filters and integrated circuit devices, and strive to achieve technical differentiation. In terms of internal governance, the quasi “full ownership” mechanism is a significant bright spot.
From the perspective of new products, the downstream of military RF MLCC is mainly missile and radar, with strong demand; Civil high-frequency radio frequency MLCC is essential in millimeter wave band base stations. The layout of the company in Chengdu has opened up a new growth point of integrated circuit components. The company also makes efforts in high-end fields such as civil high-end MLCC, RF filter and export market.
Investment suggestions:
The high growth in recent years has provided abundant financial support for the company. The growth of the industry itself + the expansion of the company’s product line = sustained and reliable growth. It is expected that this year’s orders will show a “low before high” trend, and can maintain a compound growth rate of 35% – 40% in the next three years. It is a rare deterministic growth company in the military industry sector, which can be given a certain premium. Considering that there are many factors limiting the expansion of downstream customers, based on the principle of prudence, the operating revenue of the company in 20222023 is adjusted from RMB 3.969 billion and RMB 5.176 billion to RMB 3.278 billion and RMB 4.309 billion, the net profit attributable to the parent company is adjusted from RMB 1.247 billion and RMB 1.637 billion to RMB 1.159 billion and RMB 1.586 billion, and the EPS is adjusted from RMB 537 million and RMB 704 million to RMB 4.99 and RMB 682 million. It is estimated that the company will realize operating revenue of 3.278 billion yuan, 4.309 billion yuan and 5.391 billion yuan from 2022 to 2024, net profit attributable to the parent company of 1.159 billion yuan, 1.586 billion yuan and 2.051 billion yuan, EPS of 4.99 yuan, 6.82 yuan and 8.83 yuan, corresponding to the closing price of 128.46 yuan / share on April 1, 2022, PE of 26 times, 19 times and 15 times respectively, maintaining the buy rating.
Risk tips:
1) the company’s self-produced products are mainly used in the field of military industry. Customers’ procurement planning is strong, and there is a risk that customers’ orders are less than expected; 2) The agency business of the company is greatly affected by the international MLCC price, and there is a risk of decline in product price and profit margin; 3) The company’s downstream customers cover a wide range, and there are many constraints on the production expansion progress of some customers. There is a risk that the release rhythm of downstream demand is less than expected.
