The 2022 results are in line with our expectations

Announced 2022 results: revenue of 1,461 billion yuan, +2.70% year on year; net profit of the mother was 190 million yuan, -2.37% year on year. 4Q22 revenue was 439 million yuan, +6.78% year on year, +16.13% month on month; return net profit was 69 million yuan, +68.17% year on year, +42.73% month on month. It met our expectations.

Development trends

The trend of electrification has led to an improvement in automotive electronics revenue, and new energy products have contributed an important marginal increase. The revenue of the automotive electronics and consumer electronics sectors in 2022 was +8.44%/-2.25% year-on-year, respectively, to 1,027 million yuan/303 billion yuan. The overall performance increased steadily. The main reason was: 1) The automotive electronics business entered a stable release period, with a revenue share of +3.72ppt to 70.31% year-on-year. 2) The market trend of rapid growth in sales of new energy vehicles and rising penetration rates is driving the demand for connectors. The company's new energy project revenue increased sharply by +73.01% year on year; 3) Actively expanding the product matrix, two new production lines for steering systems were officially mass-produced, and the filters in the new energy “Sandian” have delivered 260,000 products to customers. Looking ahead, we believe that with the development of intelligent electrification and the continuous enrichment of product categories developed by the company, the performance center is expected to accelerate.

Profit recovery accelerated in 4Q22, and strong cash flow highlighted the margin of safety. Gross margin in 2022 was 30.34%, year-on-year -0.59ppt, 4Q22 gross margin was 32.24%, year-on-year +9.24ppt, and +3.15ppt month-on-month. The weak annual gross margin is mainly dragged down by price increases for raw materials such as copper and plastic materials. Since the direct cost of raw materials on the company's cost side accounts for the largest share, upstream disturbance transmission is more obvious. Since 3Q22, raw material prices have declined somewhat, and gross margin has improved month-on-month, showing good performance and resilience. Net operating cash flow was sufficient, up +93.24% year over year 21 to $239 million. We believe that with the expansion of the company's market share and the gradual release of scale effects, upstream bargaining power will increase. Combined with the optimization of bicycle supporting value brought about by product restructuring, profit performance can be expected.

The layout of highly additional products that integrate diverse functions, and production is progressing incrementally in an orderly manner. Automotive electronics products are used in batches by large-scale auto parts vendors represented by Bosch. A relatively mature customer supply system has been established, while promoting technological innovation and upgrading and more product support; the company has issued no more than 660 million yuan in convertible bond financing and plans to invest 750 million yuan to build an electronic spare parts production base for new energy vehicles in Jiaxing; 79 new development and mass production projects in the fields of steering systems, power management systems, electric drive management systems, etc., have established 79 new development and mass production projects, and 97 research projects are under way. We expect the company's continued investment in the fields of new energy and intelligent driving, which is expected to build the next growth curve after connector products.

Profit forecasting and valuation

Due to the gradual expansion of the new energy business, we raised our net profit in 2023 by 9.9% to 259 million yuan, introducing net profit of 2024 of 297 million yuan for the first time. The current stock price corresponds to the 2023/2024 price-earnings ratio of 25.1 times/21.9 times. Maintaining an outperforming industry rating and a target price of 19.30 yuan corresponds to 30.1 times the 2023 price-earnings ratio and 26.3 times the 2024 price-earnings ratio. There is 20.0% room for improvement compared to the current stock price.

risks

The progress of the new project fell short of expectations, car sales and orders fell short of expectations, and the increase in raw material prices exceeded expectations.