Key points of investment

2022/2023Q1 revenue was +32%/+31% year on year, net profit of the mother was +22%/+119% year on year. Q1 performance exceeded market expectations. The company achieved revenue of 5.48 billion/1.56 billion yuan respectively in 2022/2023Q1, +32%/+31% year on year; achieved net profit of 4.7 million/160 million yuan, +22%/+119% year on year; after deducting 260 million million/10 million yuan from non-Gimu, -2%/+57% year on year. Looking at the quality of operations, excluding stock option fees and interest on convertible bonds in '22, the return was 280 million, +5% year on year, in line with market expectations; while net interest rates began to pick up in 23Q1, and performance exceeded market expectations. Among them, without increasing year by year since 2015, the company has continued to invest around the upstream and downstream industrial chains over the years. It added 10 new shares in 22 companies, invested 73.07 million in foreign equity (excluding consolidated companies), and received 178 million yuan in fair value change profits and losses due to increased valuations of investment companies that year. The share of export sales increased from 26% in '21 to 31% in '22. The company increased sales and even manufacturing plant layout in the US, Europe, Southeast Asia, etc., to seize overseas market opportunities while controlling overseas risks.

Downstream structure optimization and a decline in raw material prices have led to a steady increase in gross margin. The gross margin for 2022/2023Q1 was 23.8%/24.1%, respectively, and -2.8 pct/+0.0pct over the previous year; the net interest rate for the mother was 8.6%/10.3%, respectively, and -0.7pct/+4.2pct over the previous year.

The decline in gross margin is mainly due to: 1) chip supply is tight and prices remain high; 2) structural effects, where the gross margin of rapidly growing new energy vehicles, smart home appliance electronic control, etc. is low. We expect gross margin for 22Q3-Q4 to be at a relative bottom, while the tight chip supply problem has been mitigated and prices are on a downward trend. We expect gross margin to increase month-on-month starting in Q2, and all business sectors are expected to see signs of gross margin recovery. On the cost side, sales, management, R&D, and finance rates in 2022 were 4.2%/2.6%/11.5%/0.4%, respectively, and were basically the same as -0.6pct/+0.5pct/-0.2pct, respectively. Among them, R&D expenses remained high at over 10% to ensure medium- to long-term category expansion.

According to business characteristics, the company reclassified the four major business segments into six business groups. From a profit perspective, smart home appliances, power supplies, and industrial automation have entered a harvest period, and the revenue perspective of transportation (new energy vehicles) and precision connectivity has grown rapidly, but it is still in the cultivation period, waiting for the scale effect to be highlighted: 1) Smart Home Appliances: Revenue of 22 billion yuan, +32% over the same period last year (38% of revenue). Strong demand for air source heat pumps, commercial air conditioners, and inverter-frequency appliances in India is driving rapid growth in the sector, and smart sanitary ware is developing steadily. 2) Power products: Revenue of 1.88 billion yuan in '22 was +25% (34%) compared to the previous year, and total orders for the whole year increased significantly. Power supplies have moved from the investment period to the harvest period. Overseas orders for servers and communication power supplies have soared, and domestic server manufacturers have also received entry; the ODM business for photovoltaic & energy storage core components has increased dramatically, and charging piles have been deployed domestically and abroad from modules to complete machines; display power supplies and PC power supplies are growing steadily. 3) Transportation: Revenue in '22 was 530 million, +95% year on year (accounting for 10%). The business got rid of BAIC's single major customer situation, added vehicle customers such as Nana and Zero Run, and expanded its products to higher barriers such as thermal management, cables, etc.; in addition to new energy vehicles, there is also investment in the electrification of vehicles such as two-wheelers. 4) Industrial automation: Revenue of $380 million in '22, +41% year on year (7%). The range is gradually being enriched. In addition to inverters, servos, and PLCs launching next-generation products, it focuses on exploration in new fields such as electromechanical and hydraulic solutions, the electrification of construction machinery, and wind power variable propeller drives. 5) Intelligent equipment: revenue of 300 million in '22, -21% (5%) compared to the previous year. Affected by the downturn in the domestic economy, demand for intelligent welding machines, microwaves, and oil production equipment is insufficient. 6) Precision connectivity: Revenue of $270 million in '22, +109% year on year (5%). Including various types of electromagnetic wires, FFC, and FPC, it not only optimizes the company's internal supply of magnetic components, but also achieves foreign sales. Among them, the safety signal connection components used in power/energy storage battery packs for new energy vehicles have established cooperation with well-known power battery manufacturers, and large-scale sales are expected in the future.

Profit forecast and investment rating: The company's Q1 performance exceeded expectations, and orders in multiple sectors are rising, and profit margins are expected to gradually pick up. We raised the 2023-2024 net profit to 674 million (+0.50) /882 million (+0.28). The estimated net profit returned to the mother in 2025 was 1,134 million, compared with +43%/+31%/+29% respectively. The corresponding current price valuations were 22x, 17x, 13x, maintaining the “buy” rating, respectively.

Risk warning: macroeconomic downturn, electric vehicle sales falling short of expectations, increased competition, price increases of raw materials exceeding expectations, etc.