M&S Electronics is mainly engaged in the R&D, manufacturing, sales and technical services of satellite navigation and communication terminal equipment, and is the core manufacturer of high dynamic satellite navigation and communication. The Company has been deeply engaged in the main business of satellite navigation for many years, with continuous R&D investment. It has accumulated profound technology in the field of high dynamic aC and built solid barriers, and the technical level of receivers is leading in the industry. Benefiting from the grid connection of the BeiDou-3 Navigation Satellite System （BDS-3） and the strong demand for military products during the 14th Five-Year Plan period （2021-2025）， the satellite navigation market has broad prospects. The Company announced its equity incentive plan in Apr 2022, demonstrating its confidence in future development. Based on PE and PEG valuation methods and considering the valuation of comparable companies, we assign 45x 2023E PE and 0.64x 2023E PEG to derive a target price of Rmb110 and initiate coverage with a "BUY" rating.

As a core maker of high dynamic satellite navigation, M&S Electronics’ inventories will likely hit new highs with further growth in performance.

M&S Electronics is a high-tech enterprise engaged in the R&D, manufacturing, sales and technical services of satellite navigation and communication terminal equipment. It provides navigation terminal equipment, core components, satellite communication antennas and components based on the BDS and other series of products. Its business scope covers military products and household products, and provides terminal products and technical services for customers in national defense, civil aviation and marine fisheries, etc. The Company has been deeply engaged in satellite navigation and communication for many years, and is one of the few domestic manufacturers that independently master the core technologies of satellite navigation and communication. With the downstream models coming into mass production, M&S Electronics has sufficient orders in hand. Its operating revenue and earnings posted a CAGR of 23.90%/43.05% over 2018-2021, showing a rapid growth trend. The revenue growth slowed in 1-3Q22 due to resurgent regional Covid flare-ups. As of 3Q22, the Company's inventories increased by 78.12% from the end of 2021 to Rmb299mn, hitting a historical high. We expect smooth delivery of orders going forward with accelerated earnings growth, which may lead to a turning point for its performance.

The robust demand for satellite-based weapons brings the Company’s leading edges in high dynamic technology to the fore.

Satellite navigation is M&S Electronics' largest business, accounting for nearly 78% of the total revenue in 2021. The Company's satellite navigation receivers are mainly used in satellite guided missiles, with leading signal reception and processing in high dynamic scenarios in China. Its satellite navigation components and special test equipment also have strong technical advantages and can realize high-precision time service and simulation functions. M&S Electronics has solid competitive barriers, stable competitive　　position and obvious competitive advantages in satellite navigation business.

With the connection of the BDS-3 to the grid and the implementation of the 14th Five-Year Plan period （2021-2025）， China's demand for upgrading military equipment and enhancing military capabilities continues to rise. We expect more upside surprises from satellite navigation-related markets, and the Company's satellite navigation business is likely to grow rapidly, which will further consolidate and enhance its leading position in the industry.

Venturing into the data chain business backed by the advantages in high dynamic technology.

Relying on the cumulative technical know-how in the high dynamic field, M&S Electronics will likely venture into data chains and electronic countermeasure, which is likely to drive up its secular development. Data chains are the key technology for missile network and missile intelligentization. The application of domestic missile data chains is still in the initial development stage, indicating vast growth headroom for installations and subsequent upgrades. The Company has significant technical advantages in the field of data chains. It is one of the first private enterprises in China to successfully develop the terminal products of integrated missile-borne navigation data and apply them to the defense weapon platform. The blue ocean market for deflectors has great potential, and M&S Electronics is likely to gain a first-mover advantage based on the high homology between the countermeasure technology and the Company's existing technology.

Overseas markets may be a breakthrough for the Company’s satellite communication business.

In satellite communication field, M&S Electronics is mainly engaged in mobile communication antenna products, with business primarily covering household products. Saudi Arabia is the Company's main cooperative partner in overseas sales, which, however, has been significantly impacted by overseas Covid flare-ups in recent years, leading to a serious shortage of product exports for the Company in 2021. Its shipborne business has entered a number of cooperation with telecom branches in coastal areas. Although the market has not yet formed and the competition is fierce, the foundation has been laid. In general, with the abating of global pandemic, M&S Electronics’ satellite communication is likely to resume sustained and steady development.

The overseas market may be a breakthrough for satellite communication, which may launch its second growth curve.

Potential risks: Disappointing development of new products; high customer concentration; gloomy prospects for the satellite communication market; the leakage of core technologies; intensified market competition; corrections in favorable tax policies; the resurgences of regional Covid flare-ups exceeding expectations.

Investment strategy: Considering M&S Electronics’ cumulative technological know-how in high dynamic anti-jamming, satellite communications and satellite navigation, we expect it to gain a stable foothold in the market. As downstream products are gradually being put into mass production, we forecast its 2022E-24E attributable net profit （ANP） to be Rmb0.14bn/0.28bn/0.4bn, equivalent to EPS forecasts of Rmb1.21/2.45/3.48, and corresponding to 68x/32x/24x 2022E/23E/24E PE at the current price of Rmb82.52. Based on the average comps valuation of 43x 2023E PE and 1.2x 2023E PEG for Corpro Technology （300101.SZ）， Guobo Electronics （688375.SH）， Space Appliance （002025.SZ） and Relpow Technology （300593.SZ）， which are traded at　　68x/34x/24x 2023E PE based on Wind consensus estimates, we prudently assign 45x 2023E PE and 0.64x 2023E PEG to derive a target market cap of Rmb12.5bn, corresponding to a target price of Rmb110. We initiate coverage with a "BUY" rating.