Key points of investment:
Incident: Weifeng Electronics announced its 2022 annual report. In 2022, the company achieved operating income of 480 million yuan, an increase of 17.56% over the previous year; Guimu's net profit was 112 million yuan, an increase of 11.96% over the previous year.
The performance is basically in line with expectations. The industrial sector is under pressure in the short term, and automobiles and new energy are rising as scheduled. The company selected application scenarios in the connector business, forming an integrated two-wing development pattern dominated by industrial control and complemented by automobiles and new energy. The company's industrial/automobile/new energy sector revenue in 2022 was 3.11/0.86/76 million respectively, accounting for 65%/18%/16% of revenue. From the perspective of growth rate, automotive connectors and new energy connectors have increased rapidly, reaching 47% and 75% in '22. The industrial connector market was weakly influenced by macroeconomics. Combined with the geopolitical influence of the Russian-Ukrainian war, the operating rate of export customers (especially in Europe) declined compared to the same period in previous years, affecting the orders and willingness of export customers to pick up goods (the company's share of overseas revenue fell from 36.1% in 2021 to 25.2% in 2022). The above reasons led to weak growth in the company's industrial sector. The sector achieved positive growth of 3.9% in '22. Furthermore, the company plans to distribute a cash dividend of RMB 5.00 (tax included) for every 10 shares to all shareholders based on the total share capital of 73,262,396 shares as of April 10, 2023; at the same time, the capital reserve fund will be used to transfer 5 shares to all shareholders for every 10 shares. According to the company's “Notice on Responding to the Letter of Concern from the Shenzhen Stock Exchange” on April 12, this matter conforms to the interests of the company and all shareholders, is conducive to sharing the operating results of the company's growth with all shareholders, is conducive to optimizing the company's share capital structure, increasing the number of shares in the company's circulation, and improving the liquidity of the company's shares.
Domestic production continues to be replaced, and the pace is steady in broad space. The company has more than 20 years of experience in connector R&D, design, production and sales, and its products are sold domestically and to Europe, America, Japan, South Korea and other parts of the world. At the same time, the company has maintained good cooperative relationships with well-known domestic and foreign companies such as Huichuan Technology, BYD, Sunshine Power, Delta Electronics, and An Bofu. It already has a high brand awareness in the field of industrial control, and has also gained some market influence in the automotive and new energy fields.
Multiple varieties, small batches, and customization build competitive barriers, with more than 15,000 product numbers. With high-quality product positioning, a multi-category small-batch model, and the internal management advantages of implementing this model, a higher gross profit margin than comparable companies was achieved. The company's gross margin fell slightly by about 2 pct to 43.7% in 2022, mainly due to a decline in gross margin in the industrial control sector, which is related to the specificity of the industry last year. It is expected that gross margin will be relatively stable at a high level as the scale expands.
Profit forecasts were lowered slightly to maintain the “buy” rating. Considering the uncertainty of the export boom of industrial control products and the risk of fluctuations in demand for new energy vehicles, we slightly lowered our profit forecast for 23-24 (the previous forecast was net profit of 181/237 million) and added a 25-year profit forecast. It is estimated that the company's net profit for 23-25 will be 1.76/23/258 million yuan. The current stock price corresponding to PE is 37/29/25 times. The company's automobile and new energy connector business is expected to contribute to performance and valuation flexibility to maintain the “buy” rating.
Risk warning: the risk of fluctuations in the international macroeconomic and political situation, the risk of increased competition in the industry, and the risk of fluctuations in raw material prices.