3Q22 performance is lower than market expectations.

The company announced 3Q22 results: 3Q22 income of 168 million yuan, month-on-month comparison-28.7% compared with 43.9%; return to the mother net profit of 17 million yuan, year-on-year-55.4% / month-on-month-66.7%. The income of 1-3Q22 is 678 million yuan,-19.95% compared with the same period last year, and the net profit is 94 million yuan,-33.50% compared with the same period last year. The 3Q22 performance is lower than the market expectation, mainly because the epidemic repeatedly affects the project delivery, and the relative rigidity of the cost drags down the profit margin.

Trend of development

The epidemic repeatedly affects revenue performance, and orders on hand are full to support long-term development. The company's 3Q22 revenue decreased significantly compared with the previous month, mainly because the epidemic situation across the country repeatedly affected personnel mobility / project promotion, resulting in a slowdown in project acceptance progress and delivery rhythm fluctuations resulting in lower-than-expected revenue performance. The company has relatively full orders on hand and continues to expand new projects. 3Q22 signed a 140 million yuan project contract with an intelligent driving technology company associated with a large technology company. the revenue is strongly related to on-hand orders. when the external environment (such as epidemic / car mood, etc.) returns to normal, we expect the project to return to normal, and quarterly revenue is expected to be repaired to a higher revenue center. Looking forward, we believe that the company has built know-how advantages in terms of smart business, and on-hand orders are expected to support a return to high revenue in the medium to long term.

The gross profit margin rebounded month-on-month, and the expense rate was under short-term pressure. 3Q22 gross profit margin is 40.31%, year-on-year-1.92ppt, month-on-month + 4.95ppt, gross profit margin increases even when DHT gearbox starts mass production, design project gross profit margin remains high; 1-3Q22 gross profit margin is 37.88%, year-on-year-0.35ppt. On the cost side, 3Q22's R & D expense rate ranges from + 3.98ppt to 4.87%. The company's SOA developer platform is officially launched to solve the pain points of automotive software development and help car digitization. Due to the relative rigidity of period expenses such as management fees, the cost rate during the 3Q22 period is from + 14.1ppt to 27.7%.

Looking ahead, we believe that profitability is expected to improve marginally as the pace of revenue recognition accelerates.

Share buyback shows confidence, employee stock ownership plan to achieve benefit sharing, the continuous layout of the vehicle ODM business. In the past 22 years, the company has twice proposed to implement employee stock ownership, and issued the employee stock ownership plan (draft). It is proposed to open a total of 60.6258 million subscription shares to employees, of which 83.69% will be used to motivate middle-level and core technical personnel. we believe that the company's employee stock ownership plan is conducive to binding the interests of core employees and fully mobilize the enthusiasm of employees. As the production capacity of Sichuan factories climbs, the parts business is expected to contribute to the increase. In terms of ODM business, the company has been granted the initiative to terminate the Tianjin Boxun transaction due to the limited continuity of qualifications, but it is still actively promoting the acquisition of other target qualifications, and the company will continue to focus on the main business of automobile design and new energy auto parts business, skateboard chassis / ODM and other forward-looking business in the short term.

Profit forecast and valuation

The delivery rhythm of the project fluctuated, and we reduced the net profit of 2022Unix by 28.4% of net profit of 2023 to RMB 168 million / 262 million. The current share price corresponds to a price-to-earnings ratio of 34.9 times 2023 / 22.4 times 2023. To maintain an outperforming industry rating, we simultaneously lowered our target price by 29.9% to 14.10 yuan corresponding to 42.1 times 2022 price-to-earnings ratio and 27.0 times 2023 price-to-earnings ratio, which has 20.5% upside space compared with the current stock price.

Risk

The growth of spare parts business is not as expected, the expansion of new projects is not as expected, and the delivery of on-hand orders is not as expected.