The industrial Internet transition was initially completed, and the military industry’s rapid growth was expected to end

Focusing on infrastructure, the industrial Internet transition was initially completed: In recent years, the company has been actively implementing a transition strategy from a professional supplier of industrial Ethernet switches to an integrated industrial technology solution provider for industrial interconnects, and has laid out a platform for industrial Internet technologies and solutions. In terms of technology, the company focused on the technical development of the industrial Internet infrastructure-laaS layer and has completed industrial communication chips, industrial communication network products, industrial Internet operating systems (Intewell Industrial Internet Operating System/Cloud Platform), and industrial server products. Development work; in the field of industrial applications, breakthroughs have been made in the power and transportation industries. As the Industrial Internet has become a national strategy, the development of the industry will enter the fast lane. The company's product layout and existing customer channels allow the company to share the dividends from the development of the industry.

 

With both endogenous and epitaxy approaches, the rapid growth of the military business is expected to occur. In the face of the autonomous and controllable requirements of the military communications exchange chip, from 2016, the company has introduced multiple employees of Huawei Hass to start the exchange chip R&D, and the research and development costs directly In 2015, 40 million was raised to about 110 million yuan, and in 2017 it reached about 150 million yuan. At present, the company has introduced a switching chip (KD5660) with a switching capacity of 64 Gigabytes, and has obtained military Class A autonomous controllable products. Certification (chip design, verification, tapeout, packaging, and testing must all be completed in China); the company successfully acquired 100% equity of Keyin Keisei in 2017; on the one hand, the military operating system was independently controlled, and the other The aspect also broadened the sales channels of the military industry business. Overall, it greatly enhanced the company's military business products and sales capabilities. With the completion of the military reform, the demand for military communications is expected to pick up. The company's ability to control its own chips and operating systems allows it to gain first-mover advantage.

 

The growth of performance will usher in an inflection point and the first coverage will be given a “recommended” rating: In the next three years, the company’s revenue will maintain an increase of around 35%. From 2018 to 2020, total operating income was 1.11 billion yuan, 1.50 billion yuan and 2.01 billion yuan respectively. Performance growth will usher in a turning point. From 2018 to 2020, the company's EPS was: 0.37 yuan, 0.57 yuan, and 0.83 yuan. We give the company a PE valuation of 43 times in 2018, which is comparable to the comparable company's average. The 6-month target price is 15.91 yuan, and the first coverage is given a "recommended" rating.

 

Risk Warning: 1. The uncertainty of the growth of the military business makes the growth of the company's net profit less than expected: From our industry research and new orders for the company's military operations, we speculate that the demand for the domestic military communications market is picking up. However, it should be noted that the uncontrollability of the military industry is high. Therefore, if uncontrollable events occur, the growth in demand for the military industry business is less than expected, which will make the company's net profit growth worse than expected. 2. Uncertainty in the growth of industrial Internet products has caused the company's net profit growth to be less than expected: With the promotion of national policies, the development of the industrial Internet has moved from the concept into the stage of actual development. The company’s industrial Internet products have already started pilot operations at customers in the power and transportation industries. However, it should be noted that the growth in the demand of these customers and less than expected will make the company's net profit growth less than expected. 3. The sharp decline in the gross profit rate of big data and network services made the company's net profit grow less than expected: The major customers of big data and network services are telecommunication operators. As the service demand market of telecom operators is a more competitive market, it is not ruled out that in order to gain market share, players adopt aggressive sales strategies and drastically reduce the overall gross profit margin of the industry. If this happens, the company will also be forced to reduce the gross profit rate of big data and network services, which will cause the company's net profit growth to be less than expected.