Incident: The company released its 2022 annual report on March 28. The company achieved revenue of 3.874 billion yuan for the full year of 2022, a decrease of 23.37% over the previous year; realized net profit of 3.27 yuan, a decrease of 65.32% over the previous year; and realized net profit of 600 million yuan, a year-on-year decrease of 92.28%. On a quarterly basis, the company achieved revenue of 955 million yuan in Q4 2022, a year-on-year decrease of 13.17%, an increase of 19.27% over the previous year; it achieved net profit of 14 million yuan, a year-on-year decrease of 77.70%, an increase of 125.73% over the previous year; and realized net profit of -75 million yuan after deducting non-return to the mother, a year-on-year decrease of 232.15% and a decrease of 12.60% from the previous month.

Demand for consumer electronics has plummeted in volume and price, and the high-end market layout is expected to help recover performance: due to macroeconomic recovery falling short of expectations, demand and prices for consumer electronics terminal products such as home appliances and communications have plummeted, and the company's performance is under pressure in the short term. The company's gross margin for the full year of 2022 was 17.97%, -13.94 pcts year on year; the company's net interest rate for the full year was 8.76%, -10.05 pcts year on year. The company's gross profit margin and net interest rate both declined in 2022. The main reason was the decline in profitability of the company's main products during the reporting period due to factors such as declining market demand and the company's construction period for major projects. In terms of expenses, the company's sales, management, R&D and financial expenses rates for the full year of 2022 were 1.99%/7.49%/5.82%/-3.31%, respectively. The year-on-year changes were 0.40/0.53/-0.01/-2.85pcts, respectively. Among them, there was a sharp decline in the financial expense ratio and absolute value in 2022, mainly due to the availability of capital raised and the corresponding increase in interest income over the same period last year. Benefiting from the booming development of emerging strategic industries such as 5G communications, new energy vehicles, the Internet of Things, and new mobile smart terminals, the market demand for high-end electronic component products is stable. In order to cope with the continued slump in demand in the consumer electronics market and changes in the market demand situation, the company is actively laying out high-end application fields and emerging markets to accelerate high-end technology research and development. In the future, new breakthroughs will continue to be achieved with the high-end market layout, and the company's performance is expected to continue to improve.

Accelerate high-end business development and continuously optimize products and customer structures: the company continues to promote product and customer structure optimization, and high-end business product development and market development are progressing smoothly. On the one hand, in 2022, the company's share of high-end capacitors and resistors output increased 14% and 6%, respectively. The self-production rate of high-end materials increased by nearly 10 pcts, and the output rate of high-end products and the self-production rate of high-end materials increased dramatically. On the other hand, the company's PIM miniature integrated inductors were mass-produced, some specifications of wafer porcelain dielectric capacitors were replaced domestically in the supply chain of core customers, and the supercapacitor 10 farah products were certified by the State Grid. In addition, the company focuses on developing industry benchmark customers, targeting high-end application markets such as vehicle regulations, industrial control, medical care, etc., and simultaneously lays out markets in emerging fields such as AR\ VR, wind power, and photovoltaics. In 2022, more than 2000 of the company's products passed strategic customer certification, and strategic customer delivery of Xianghe Project's high-end MLCC increased by more than 100% year-on-year; total shipments to the top ten end customers increased by about 3 pcts year over year, and sales of new customers increased by more than 90% year-on-year.

The steady increase helps transformation and upgrading, and the automotive electronics business is expected to establish the second revenue growth pole: in 2022, the company successfully completed a 5 billion yuan non-public offering project, and the funds raised were used for the “Xianghe Industrial Park High-end Capacitor Base Construction Project” and the “Technology Improvement and Production Expansion Project with an Additional Monthly Output of 28 billion Chip Resistors”.

The implementation of this non-public offering project will further increase the scale of high-tech content, high-value-added MLCC and chip resistor products on the premise of consolidating the company's existing technology, quality and supply guarantee advantages. At the same time, through in-depth linkage with strategic customers, it will accelerate the deployment of high-end markets such as next-generation mobile communication technology, automotive electronics and industrial intelligent control, and comprehensively enhance the company's overall market competitiveness. According to JWinSight's forecast, global automotive MLCC usage will increase to about 650 billion in 2025, and China's automotive MLCC usage will increase from about 150 billion in 2021 to over 280 billion in 2025. Furthermore, new energy vehicles are becoming the main engine for the growth of automotive MLCCs. It is estimated that by 2025, the use of MLCCs for new energy vehicles will exceed 330 billion, which will become the main growth driver for MLCCs after 5G. In 2022, the company actively laid out high-end application fields such as automotive electronics and industrial control to promote the high-end transformation of the company's business structure. The product level moved from industrial grade to vehicle specification, and the sales volume of automotive standard products and the proportion of automotive electronics customers continued to increase. With the rapid growth of the NEV industry in the future, the company's high-end electronic components for vehicles are expected to usher in major development opportunities.

Maintaining the “increase in ownership” rating: Currently, the company is based on the high-end industry, developing benchmark customers such as 5G applications, new energy vehicles, photovoltaics, etc., and has achieved remarkable results. In 2022, the company's high-end product sales share increased dramatically year-on-year, and successfully introduced a full range of vehicle regulation products for benchmark customers in the NEV industry. As the company continues to deepen its layout in fields such as photovoltaics and new energy vehicles, the penetration rate of high-end products is expected to continue to increase, and the company is expected to enter a new period of rapid development in the future. We are optimistic that the company's automotive electronics business has broad growth potential and the company's competitive advantage in the industry, so we maintain the “increase in holdings” rating. The company's net profit for 2023-2025 is estimated to be 523 million yuan, 923 million yuan, and 1,219 million yuan respectively; EPS is 0.45 yuan, 0.80 yuan, and 1.05 yuan respectively; PE is 41X, 23X, and 18X respectively.

Risk warning: market demand falls short of expectations; risk of rising supply chain costs; risk of continued downturn in the macroeconomic environment; risk of increased market competition.