The company focuses on R&D, production and sales of precision components for communication connectors and precision components for automotive connectors. With integrated comprehensive service capabilities integrating precision mold design and development and product manufacturing, the company has established long-term and stable cooperative relationships with international connector giants. The company's product range continues to expand, and its share among major customers continues to increase; at the same time, the company is actively transforming to Tier-1 in the field of automotive connectors, deeply tied to industry leader BYD. The company directly benefits from the development of AI driven by the demand for computing power. The growth of the communication connector business is expected to exceed expectations, with coverage for the first time, and a “increase in holdings” rating.
The company focuses on connectors and connector components, and the customer quality is extremely high. The company was founded in 2003 and focuses on communication connector components and automotive connector components, and relies on the competitive advantages of integrated integrated services for precision mold design and development and product manufacturing. Company communication connectors are used in large-scale data storage and switching equipment such as communication base stations and servers. Specific products are mainly high-speed backplane connector components and I/O connector components, including precision structural parts and housings (CAGES). The customers are mainly global first-tier giants such as Amphenol, Moss, and China Aviation Optoelectronics; the company supplies automotive connectors to well-known automotive electronics providers such as Halbak, Moss, Tyco, etc., and are eventually applied to internationally renowned automobile brands such as Volkswagen and BMW. At the same time, the company is committed to building BYD's benchmark customers and transforming to Tier-1.
The profit quality is excellent, and the focus is on R&D investment. Benefiting from the high degree of refinement and customization of the company's products, the company's profitability has maintained a high level. The gross margins for the first three quarters of 2020, 2021 and 2022 were 37.3%, 34.8%, and 35.6% respectively, net interest rates were 20.33%, 19.26%, 20.74%, and ROE was 14.3%, 14.2%, and 15.9% respectively. The company focuses on R&D investment. The R&D expenditure rates for the first three quarters of 2020, 2021 and 2022 were 7.8%, 6.5%, and 7.2% respectively, which were the most important components of the period expenses. As of the first three quarters of 2022, the company has obtained 109 patents, including 34 authorized invention patents and 75 utility model patents in China. At the same time, many of the company's research projects are in the R&D stage, which are used in the fields of new energy vehicles, I/O connectors, backplane connectors, etc., and the continuous transformation of R&D results promotes the company's long-term development.
The server connector category has been upgraded, and the share of major customers continues to increase. The increase in high-speed downstream application scenarios for servers places higher demands on the transmission rate and stability of high-performance communication connectors. Since the increase in transmission rate accelerates the degree of heating of the connector, it is necessary to achieve higher heat dissipation efficiency by installing radiators. The self-supply ratio of radiators is continuously increasing to save raw material costs, causing gross margin to rise steadily against the backdrop of adverse global inflation. At the same time, category expansion is driving the company's share among major customers to continue to increase.
The company is actively expanding production to meet downstream demand. After the newly raised project is put into operation, it is estimated that 620 million new communication connector production capacity will be added, with CAGE and WAFER connectors accounting for 95% and 5% respectively. With the expansion of the company's categories and production capacity, it is expected that the company's communication connector business will maintain rapid growth.
Automotive connectors are being transformed to Tier-1, expanding the product matrix while expanding the customer base. The company's automotive business segment focuses on controllers, wiring harness connectors, and high-voltage connectors, and achieved revenue of 76 million yuan in 2021. The company focuses on building BYD as a benchmark customer. Currently, the supply of products with BYD includes electronic locks, a series of electric water pumps, electronic control units, high-pressure copper busbars, etc., and the value of bicycles continues to increase.
At the same time, the company's customer resources continued to increase, and in addition to BYD, it expanded high-quality customers such as Phoenix Electric, Nandu Power, Honeycomb Energy, and Yiwei Lithium Energy. The company's new fund-raising projects are expected to contribute 3.7 billion dollars of output after delivery, of which high voltage connectors, electronic control connectors, electric water pump connectors and high voltage interlock connectors account for 40%, 30%, 27%, and 3% respectively. Benefiting from the increase in the penetration rate of new energy vehicles and the increase in the localization rate of automobiles, it is expected that the company's automotive connector products will continue to grow rapidly.
Investment advice: We expect the company's net profit to be 168 million yuan/251 million yuan/360 million yuan respectively in 2022-2024. The corresponding growth rate will be 54%/49%/44%, and the corresponding PE will be 3889X/26.1X/18.1X respectively, covering a “increase in holdings” rating for the first time.
Risk warning: demand from major customers falls short of expectations, risk of declining gross margin of automotive connectors, risk of falling gross margin of automotive connectors, risk of rising raw material prices, risk of restricted stock being lifted