Incident: The company released its 2022 annual report. Net profit returned to the mother was 91 million, +216% year on year; after deducting non-net profit of 89 million, +209% year on year. Net profit for Q4 was 19 million yuan, +131% year on year and -40% month on month.

The release of diamond wire production capacity led to a high increase in production and sales, and the annual performance turned a loss into a profit. The company's net profit of $91 million in 2022 was in line with the previous performance forecast range: 1) Amortization of equity incentive expenses affected Q4 performance: The company's equity incentive expenses in 2022 were about 26 million yuan, which dragged down Q4 performance (reflected in a sharp increase in management/sales/R&D expenses). If the influence of this factor is excluded, the actual Q4 performance still increased 40% + month-on-month. 2) The release of King Kong cable production capacity led to a rise in production and sales throughout the year: with the rise in downstream demand for photovoltaics, the company actively expanded production, and the verification of 20 wire machines was successful. The production capacity of King Kong wire increased from 800,000 km/month in January 2022 to 3 million km/month in December, which in turn led to 1448/13.1 million kilometers per year in 2022, +293%/+290% over the same period last year. 3) Profitability increased and stabilized: The company's gross margin in 2022 was about 35.3%, +21.5pct over the previous year, and showed a quarterly upward trend. Q1/Q2/Q3/Q4 were 28%/35%/38% respectively, mainly driven by large-scale efficiency plus increased production efficiency. At the same time, the company reduced raw material costs by locking prices with suppliers early on and increasing the self-production ratio of core raw materials.

Production capacity is expanding rapidly, and the trend of thinning wire continues to advance, and the release of tungsten wire can be expected. 1) Rapid expansion of King Kong wire production capacity: By the end of 2022, the company's King Kong line production capacity had reached 3 million kilometers per month. In November 2022, the company began a new round of capacity improvement plans. It is expected that 2023H1 will expand the production capacity of King Kong wire to 6 million kilometers per month through equipment technology reform, process improvement, and purchase of some new production lines. In the future, under the high boom in the photovoltaic industry, demand for King Kong wire is expected to continue to grow, and the company's market share may continue to increase. 2) The trend of fine wire continues to advance: Currently, the company's main specification for carbon steel wire diamond wire diameters is 35um (accounting for about 60%), followed by 38um, and the smallest specification for small-batch applications is 33um. At the same time, the company's tungsten wire is also gradually being sold. Among them, large-scale supply is mainly 30-32um, and 27um will begin to be supplied in small batches. In the future, as the supply of tungsten wire increases and costs fall, the penetration rate of the company's tungsten wire is expected to increase.

Profit forecast and investment advice: The company's net profit for 2023/2024/2025 is estimated to be 3.2, 43, 540 million yuan. Considering the boom in the downstream photovoltaic industry, the company's diamond wire production capacity is expanding rapidly, and fine-line innovation is at the forefront of the industry, with great potential, giving it an “increase in holdings” rating.

Risk warning: the risk of downstream demand falling short of expectations, slow progress in project commissioning, and risk of raw material costs.