Recently, the secondary market has been a mixed bag of joy and sorrow for investors. However, those who have been following Zongheng Communication (603602.SH) would have noticed that since October 17th, the stock has consecutively hit four daily limit-ups (as of October 22, 2024). As of the latest date, the stock has maintained a level of 17.50 yuan per share, with its upward trend solidified.

The reasons for Zongheng Communication's popularity among investors are twofold. On one hand, as a leading domestic network technology service provider, Zongheng Communication, backed by the three major operators, has consistently maintained steady growth in performance, with its digital marketing business continuously exploding. On the other hand, Zongheng Communication has successfully positioned itself at the forefront of the low-altitude economy, now ranking among the top in the high-quality flight control system track.

I. Strategically Positioning in the Low-Altitude Economy, Securing a Foothold in a Potential Market

Established in 2006, Zongheng Communication has been deeply involved in the communications industry for nearly two decades. While consolidating its core business in communications, Zongheng Communication is also actively exploring new business opportunities—strategically positioning in the low-altitude economy. In July 2024, Zongheng Communication successfully acquired 100% of the equity of the domestic advanced avionics flight control system technology company—Shiwei Intelligence.

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Flight control, or the Flight Control System, is a feedback control system that can fully or partially replace the pilot's control and stabilize the motion of the aircraft, and can also improve the quality of flight. The flight control system is one of the most critical systems in eVTOL/UAVs.

eVTOL/UAVs are important carriers for the development of the low-altitude economy. Currently, China has positioned the low-altitude economy as a strategic emerging industry and has introduced a series of policies to promote its development. Data shows that in 2023, the scale of China's low-altitude economy was about 500 billion yuan, and by 2026, it is expected to enter the trillion-yuan range.

Benefiting from downstream demand, the flight control system is also expected to have a broad space for development.

According to estimates by the Aviation Industry Network, the global UAV (including eVTOL) flight control system market size was about 4.5 billion USD in 2023, and it is expected to grow to 13 billion USD by 2030.

The flight control market has a broad prospect and is highly attractive to various players. However, at the same time, the flight control system also has very high technical barriers. The airworthiness safety level requirements for eVTOL are consistent with those of civil aviation. Currently, most overseas eVTOL flight control suppliers have a background in the development of civil aircraft flight control, while domestic development in flight control systems is essentially a blank slate.In other words, in this vast incremental market, there are no domestic players yet to share a slice of the pie. As a future industry, low-altitude economy requires autonomy and controllability at its core, making the domestic substitution of eVTOL flight control systems imperative.

Under such circumstances, for domestic participants, the flight control market is akin to a golden track.

II. Acquiring Shwei Intelligence, Securing a Leading Position in the Race

Faced with the enormous development potential of the flight control market, Zongheng Communication has taken the lead by acquiring Shwei Intelligence, successfully securing a leading position in the race.

Shwei Intelligence, established in 2015, is involved in the research and development of flight control systems for eVTOLs, large and medium-sized drones, as well as various applications of industrial drones in complex scenarios.

In terms of flight control system development, the R&D team is undoubtedly the top priority.

The core members of Shwei Intelligence's R&D team come from international avionics suppliers such as Honeywell, as well as universities like Peking University, Beihang University, and Jiaotong University. Most crucially, Shwei Intelligence's R&D team members have experienced the complete development and certification process of civil aircraft flight control.

Thanks to the support of a top-notch technical team, Shwei Intelligence has established various levels of cooperative relationships with many domestic manufacturers, participating in the certification process of eVTOL development. In addition, the company has also collaborated with Shanghai Jiaotong University on AI-assisted flight systems for large civil aircraft.

Compared to groping in the dark, Shwei Intelligence has clearly seized the initiative in terms of technical accumulation and project practice. In the future, by continuously updating flight control technology through independent research and collaborative development, Shwei Intelligence is expected to successfully break through the barriers of flight control technology.

Furthermore, Shwei Intelligence has also demonstrated tremendous growth potential in the industrial drone business.In the industrial drone sector, Liontail Intelligence has integrated technologies such as flight control, intelligent networking, and obstacle avoidance, pioneering autonomous inspection of ultra-high buildings with drones in China. To date, they have completed inspections of over 200 buildings and covered an area of more than 15 million square meters. Compared to traditional manual inspections, this approach reduces costs by 70% while increasing efficiency by over 10 times.

In terms of specific applications, Liontail Intelligence has achieved the integration of drones with the construction industry. In May 2023, Liontail Intelligence and Glass Intelligent Wall Butler jointly launched a commercial operation of a drone-based glass curtain wall inspection platform. By the end of 2023, the company had accumulated inspections of over 10 million square meters.

According to statistics from the Zhiyan Zhan Industry Research Institute, in 2021, China had approximately 2.675 billion square meters of high-altitude glass, with glass curtain walls accounting for about 40% of the construction industry. Based on this calculation, the area of high-rise building curtain walls in China is about 6.6875 billion square meters.

It is evident that the potential market space for Liontail Intelligence's drone-based urban curtain wall inspection business is enormous.

At the same time, the marketing capabilities and market resources accumulated by Zongheng Communication in the past will also empower Liontail Intelligence for collaborative development. Currently, Zongheng Communication has begun to use a comprehensive digital marketing network to promote Liontail Intelligence's drone inspection services.

The cash flow generated by Liontail Intelligence's urban flight inspection business will, in turn, become a strong support for the development of eVTOL flight control systems, creating a multidimensional resonance of funds, technology, and market demand.

III. Solid Foundation and Explosive Growth in Digital Marketing

According to public information, Zongheng Communication's traditional main business is to provide services related to 5G new infrastructure for the three major telecommunications operators in China, including China Mobile, China Telecom, and China Unicom, as well as the Tower Company. These services encompass a full range of integrated services from project implementation and delivery to network operation and optimization.

In the first half of 2024, the volume of telecommunications business grew steadily, with a cumulative revenue of 894.1 billion yuan, a year-on-year increase of 3%, and the total volume of telecommunications business increased by 11.1% year-on-year. During the same period, Zongheng Communication's revenue from 5G new infrastructure also increased by 11.1%, following the industry's steady growth.

At the same time, since 2020, Zongheng Communication has seized the opportunity of the transformation of the marketing model of telecommunications operators to online channels, strategically laying out online marketing business for communication operators' products. Specifically, this involves using big data analysis and machine learning to provide comprehensive and precise digital marketing services for high-quality enterprise customers such as the three major telecommunications operators.Leveraging its inherent high-quality customer resources such as the three major operators, as well as the technical capabilities accumulated over the years, Zongheng Communication's digital marketing business has subsequently achieved explosive growth. It is reported that the company has now become a leading enterprise in the mobile and broadcasting number card marketing field.

In 2020, the business revenue was only 55.6641 million, but by 2023 it had reached 556 million. In just three years, the scale has increased tenfold. In the first half of 2024, the company's full-domain digital marketing services achieved a revenue of 523 million, continuing to grow by 180.67% year-on-year.

In addition, Zongheng Communication has adapted to the changing trends of customer needs in the digital age, using technologies such as artificial intelligence, big data, the Internet of Things, cloud computing, and mobile communication to provide one-stop solutions for the digital transformation of government and enterprise industry customers. So far, this business segment has also grown to a considerable scale, with a revenue of 103 million in the first half of the year, a year-on-year increase of 15.69%.

Nowadays, Zongheng Communication has gradually established a "one body and two wings" development pattern with 5G new infrastructure business as the main body, and digital intelligent services and full-domain digital marketing services for government and enterprise industries as the two wings.

Supported by the one body and two wings, Zongheng Communication's performance has grown steadily, with a revenue scale exceeding 900 million in the first half of 2024, a year-on-year increase of 71.69%, setting a new record for half-year revenue.

IV. 5G-A new infrastructure boosts, opening up long-term growth space

Looking ahead, in addition to the development opportunities brought by the low-altitude economy, 5G-Advanced (commonly known as 5.5G) has also emerged. In the first half of this year, China Mobile globally launched the commercial deployment of 5G-A, announced the first batch of 100 city names, and declared plans to expand to more than 300 cities nationwide within the year, building the largest-scale 5G-A commercial network.

Communication is the foundation of Zongheng Communication. After nearly 20 years of accumulation and precipitation, Zongheng Communication has rich experience in communication infrastructure projects. Under the wave of 5G-A construction, Zongheng Communication is expected to benefit directly.

In addition, Zongheng Communication's full-domain digital marketing services are also achieving leapfrog growth. With the support of high-quality customer groups such as the three major telecommunications operators, Zongheng Communication's full-domain digital marketing product categories are rapidly expanding, and the scale effect is becoming more prominent. Moreover, the profitability of the segment is steadily increasing, with both volume and profit rising.In the future, with the growth potential of the low-altitude economy market, it is believed that Zongheng Communication may have the opportunity to further open up long-term growth space.