Bangyan Technology is a leading private enterprise in defense communications with system-level product supply capabilities in three major product lines of ship communications, converged communications, and information security. Backed by guaranteed national defense expenditures, the construction of national defense informatization is advancing at a faster pace, and communications and information security in the defense industry are facing broad growth prospects. The Company will likely consolidate its edge in defense communications technologies and stand well to fully benefit from the opportunities of converged communications construction, as well as try to venture into the large ship communications market. Meanwhile, considering gradual launches of its defense communications security products with a rich pipeline of R&D projects, we expect it to benefit from the boom of national defense information security construction to refuel growth, indicating vast growth headroom ahead. We assign a target price of Rmb38 and initiate coverage with an “OVERWEIGHT” rating.
Company overview: A system-level supplier in domestic military communications.
Founded in 2000, Bangyan Technology is committed to providing industry- leading military communications solutions and is positioned to provide communications system-level and command personnel-centric products. It has developed three major business segments of ship communications, converged communications, and information security backed by years of technological iteration and project accumulation. Besides, it posted rapid development via proactively taking delegated research projects from clients and exploratory research projects. With the implementation of military reform and the empowerment of the Company's new products and projects, its earnings have achieved steady growth. From 2019 to 2021, Bangyan recorded operating revenue of Rmb270mn/279mn/308mn, up 14.85%/3.14%/10.67% YoY, with ex-one-off net profit at Rmb19mn/52mn/57mn, changing by -173.60%/169.79 %/9.74% YoY.
Industry trends: Military communications and information security see broad prospects given great growth upside in defense informatization.
At this stage, China’s military informatization is still in the initial stage of development, significantly lagging behind developed countries such as the US. However, driven by the reiterated modernization, informatization and intelligentization of military equipment in multiple government documents, such as the 14th Five-Year Plan (2021-25) and Regulations on the Test and Appraisal of Military Equipment, and backed by a large amount of guaranteed national defense expenditures, we expect military communications and information security to develop rapidly going forward. According to the data from Intelligence Research, China’s market size of military informatization reached Rmb105.7bn in 2020 and will likely rise to Rmb146.2bn in 2025, indicating vast growth headroom. Besides, China’s Ministry of Industry and Information Technology (MIIT) proposed to scale up network security market size to more than Rmb250bn by 2023, implying a CAGR of 15%+, and military information security will likely benefit from the tide of network security construction. Impacted by a sophisticated array of qualifications for manufacturing military products, it takes a long cycle to build technological barriers and define product types, leading to high entry barriers for military communications and information security. Looking ahead, private enterprises stand well to fully benefit from the trend of "civilians joining the military" and post faster growth in the process of industry development.
Ship communications and converged communications: A leading system-level product supplier that has been long engaged in the niche.
Since its establishment, Bangyan has been focusing on information and communications while iterating hardware technology platform multiple times via independent research backed by a solid technological foundation. The Company has been relentlessly perfecting its system-level product line for military communications along years of business accumulation, with products covering application scenarios of ships, various command posts at all levels, communications hubs and communications network nodes, etc. On the ship communications side, Bangyan has obvious advantages in small and medium tonnage ships. Currently, all its five ship communications products under research are designed for shore-based, medium- and large-sized and ultra large ships, and considering the likely trend of high-tech and large-sized ships for the Chinese navy going forward, we believe that the Company will likely break the bottleneck of the large-sized ship market. On the converged communications side, Bangyan has strong technological consolidation capabilities, and its product forms cover independent basic equipment and system-level products. With the launching of a new round of weapon and equipment upgrades with joint operations as the core concept, the Company's converged communications business may face development opportunities.
Information security: Seize industry opportunities to refuel growth backed by synergies with military communications.
Cyberspace has become a new high height for strategic games among countries. With the implementation of documents, such as China’s Data Security Law and the Regulations for Safe Protection of Critical Information Infrastructure, China’s cyberspace information security entered the stage of fast building, and the information security conditions at the state and military levels are particularly severe, making it extremely urgent for China to build a technological independent information security system. The Company has already ventured into information security in the early years backed by its core advantages in military communications and has accumulated technology systems and product lines in multiple forms for various scenarios. Bangyan finally defined the product types of its four platform-based mobile security terminal products in 2020, along with 13 product types under research, far outrunning that of other business segments. We believe with the continuous expansion of rigid industry demand, coupled with the sustained upgrades on the product side, the Company’s information security business will likely enter a period of rapid development as a booster to refuel growth apart from military communications.
Potential risks: New equipment products failing to be installed and sold in batches; the risk regarding technological updates and new product development; the construction of projects funded by IPO proceeds missing expectations; increased market competition; the risk of policy changes.
Investment recommendation: Given the complex and volatile international situation, Bangyan may post stable growth in ship communications and converged communications backed by huge guaranteed national defense expenditures and its leading advantage in military communications. Meanwhile, it has been taking a proactive stance in the R&D of information security products to post breakthroughs in core technologies, which will likely lead to rapid earnings growth. We forecast its 2022E-24E attributable net profit (ANP) to be Rmb60mn/120mn/180mn, equivalent to EPS forecasts of Rmb0.40/0.79/1.18.
Based on the absolute valuation method and the relative valuation method, we arrive at a target price of Rmb38 and initiate coverage with an "OVERWEIGHT" rating.
