Incident: The company released its 2022 annual report and 2023 quarterly report. It achieved revenue of 1,624 million yuan in '22, +0.15% year on year, and achieved net profit of 158 million yuan after deducting non-return mother's net profit of 158 million yuan, +2.8% year on year. 23Q1 achieved revenue of 406 million yuan, +1.84% year on year, after deducting net profit of 31 million yuan, +17.42% year on year.

Comment: The company's full-year performance in '22 showed strong resilience, and there were obvious signs of a recovery in performance in '23. We believe that as the penetration rate of new energy vehicles continues to increase, the company establishes stable cooperative relationships with leading new energy customers such as BYD and Ideal. The company is expected to benefit from the rapid development of the hybrid market, and the new energy business may continue to expand.

Profitability is showing strong resilience, and I am optimistic about the company's growth for the full year of '23. 1) Revenue side: The company achieved revenue of 1,624 billion yuan in '22, +0.18% year on year. Against the backdrop of macroeconomic disturbances and structural shortages of upstream chips, H2's hybrid pump business continued to grow dramatically in '22 and achieved steady operation throughout the year; 2) Profit side: The company's gross margin reached 25.06% in '22, achieving net profit of 158 million yuan after deducting non-homogenous mothers' net profit of 158 million yuan, and Q1 gross margin of 26.79% after deducting non-homogenous net profit of 31 million yuan, +17.42% year on year. The increase in gross margin is mainly the result of the company optimizing its product structure and actively reducing the proportion of products with low gross margins; 3) Production capacity side: The company started issuing convertible bonds in January '23. The fund-raising projects include the new energy electronic pump project and brushless motor project with an annual output of 3.5 million units, raising a total capital of 577 million yuan, which is expected to optimize the company's product structure; 4) R&D side: the company invested 118 million yuan in R&D expenses in 22 years, +11.68% over the same period last year, and the R&D cost rate reached 7.24%. As of '22, the company had 304 patents of various types, and technological leadership built the company's core barrier.

Deepen the layout of the new energy business and build barriers by binding high-quality customers. The company adheres to the strategic goal of “electrification and new energy”, increased the development of electronic pump products in 2022, and actively explored emerging fields such as car-grade motor products. In 2022, the company's new energy business achieved revenue of 267 million yuan, +186.61% year on year. 1) Electronic pump category: The product covers two major categories: electronic water pumps and electronic oil pumps. At present, the company has accumulated high-quality customer resources. In April 2022, the company received a new product designation from BYD to supply electronic oil pump products for BYD's pure electric vehicles. In addition, the company was awarded the electronic water pump project of Songzhi Thermal Management System; 2) Motor products: The products cover various types of DC brushless motors and lidar motors. Among them, the lidar motor products developed by the subsidiary Dongxingchang Technology have now been mass-produced under new electric vehicle brands, and exchanges and cooperation have been carried out with many leading lidar manufacturers.

Variable displacement pump technology is leading the way in China, and cooperation has been established with BYD to explore the blue ocean of hybrid vehicles. The company's variable displacement pump technology has been applied in large numbers, and the technology has reached the leading level in China, helping the company explore the hybrid vehicle market. In 2022, China's hybrid vehicles ushered in explosive growth. Among them, sales of plug-in hybrid vehicles in each month of '22 increased 100% + year-on-year. As a leading hybrid vehicle company, BYD sold 946,000 hybrid models in '22, +250.3% over the same period last year. At present, the company has established a deep cooperative relationship with BYD, and transmission oil pump products have a 100% market share of BYD DMi's new energy models. Furthermore, the company was awarded Ideal Auto's fully variable displacement oil pump project in '22. As the company deepens cooperation with car companies such as BYD and Ideal, it is expected to boost the company's entry into the hybrid market and open up incremental space for the company.

Investment advice: The economy recovers after the epidemic, and demand in the NEV market is expected to pick up. The company deepens cooperation with leading new energy customers such as BYD and Ideal, which is expected to open up incremental space for the company. The company's net profit from 23 to 25 is estimated to be 238, 314, and 425 million yuan respectively, maintaining the “buy” rating.

Risk warning: risk of fluctuations in the macroeconomic situation, risk of new energy vehicle penetration falling short of expectations, risk of price fluctuations of major raw materials, risk of construction of fund-raising projects falling short of expectations, risk of increased market competition