ESD is a leading digital distribution and digital retail service provider in China. Currently, it focuses on the fields of 3C digital, FMCG, and new energy vehicles centered on mobile phones. In 2022, Axalta's mobile phone sales revenue accounted for 89.34%, and non-mobile phone sales revenue accounted for 10.38%. Optimistic about the synergies between the company's acquisition of Yamaki New Energy and existing businesses and channels; the subsidiary Youyou Connect plans to be listed on the New Third Board, which favors the company's long-term development. It is expected that in the future, the company will use its own supply chain management advantages and channel resources to drive performance growth on a “private brand+cooperative brand” approach.

Revenue declined slightly in 2022, and performance was under pressure. In 2022, the company achieved operating income of 91,429 million yuan/ -3.93%, attributable net profit of 730 million yuan/ -20.79%, net profit of 703 million yuan/ -10.07%, gross profit margin of 3.36% /+0.13pct, vested net interest rate of 0.80% /-0.17pct, net attributable interest rate of 0.77% /-0.05pct, sales expenses ratio of 1.58% /+0.22pct, mainly due to reduced operating income; management expenses ratio 0.29%/-0.04pct; R&D expenses; The rate was 0.02% /+0.01pct, mainly due to the increase in R&D expenses of newly purchased subsidiaries; the inventory turnover rate was 18.84 times/-7.14 times, and the receivables turnover rate was 52.4 times/-7.71 times. 2022Q4 In a single quarter, the company achieved operating income of 23.505 billion yuan/ -21.24%, net profit attributable to 99 million yuan/ -43.06%, net profit of 116 million yuan/ -57.04%, gross profit margin 3.23% /-0.1pct, net attributable interest rate of 0.42% /-0.16pct, net attributable interest rate of 0.49% /-0.41pct, sales expenses ratio 1.73% /+0.18pct, management expense ratio 0.37% /+0.15pct, R&D expenses rate 0.04%/ +0.02pct. Due to the impact of the epidemic, the cost rate of all three income reduction items increased. The decline in the company's performance in 2022 was mainly due to the negative impact of the epidemic in the second half of 2022 on store operations and put pressure on profit margins.

Revenue from the mobile phone sales business is under pressure to improve gross margin, and revenue from non-mobile phone sales business has increased. According to product splitting, in 2022, the mobile phone sales business achieved revenue of 81,676 million yuan/ -5.15%, accounting for 89.34% /-1.15pcts, with a gross profit margin of 2.47% /+0.27pct; the non-mobile phone sales business achieved revenue of 9.495 billion yuan/+6.68%, accounting for 10.38% /+1.03pcts, with gross margin of 8.52% /-3.18pcts; other business revenue was 259 million yuan/ +69.78%, accounting for 0.28% /+0.12pct. According to market research firm Canalys, in 2022, Apple accounted for 18% of the domestic market share for the whole year, ranking first. It was the highest market share Apple has received since entering the Chinese market; Honor's annual shipment growth rate was as high as 30%, making it the second largest domestic market in terms of annual shipments; Samsung continued to invigorate the high-end market and accumulated more users with high purchasing power through the pioneering and stability of folding screen products. The company is a national-level dealer for Apple, Honor, and Samsung. It is optimistic that the company's mobile phone business will continue to contribute the main revenue and profit under the trend of high-end mobile phones, and that the non-mobile phone business will provide incremental revenue and performance in the future.

Domestic and international channels continue to expand, and the Honor brand has achieved a new breakthrough in sales scale in markets outside mainland China. ① Domestic channels continue to expand: In terms of Apple's business retail channels, the company's Coodoo brand operates 145 Apple Premium Dealer (APR) stores in the core business districts of Tier 1 to Tier 3 cities across the country, a net increase of 15, making it Apple's largest quality dealer in the world. In addition to Coodoo stores, the number of Apple authorized retail customers under management reached 1,124/ +24.6%, a net increase of 222 stores; in terms of Apple's business distribution channels, the number of Apple authorized stores and outlets currently operated and managed reached 3,064, maintaining the industry Leading position; the company is the only omni-channel retail service provider for the Honor brand. The online operation supports e-commerce channels such as Honor Tmall's official flag, Honor Select, Douyin, etc., and serves Honor Experience Stores offline. Honor phones ranked second in domestic shipments throughout 2022, and their market share has developed by leaps and bounds; the company is an important partner in Samsung's retail business, operating and managing the largest Samsung flagship experience store in China, with a total management of more than 4,000 stores. ② Overseas sales and service capabilities continue to improve: the company's overseas business developed rapidly, achieving a sales scale of 5.757 billion yuan/+71.11%, accounting for 6.3% /+2.76pcts. The company continues to expand and strengthen its overseas sales and service network, obtained exclusive authorizations from Honor in many overseas countries and regions, and joined hands with Honor to achieve new breakthroughs in sales share and sales volume in the Hong Kong market.

The company's own brand developed steadily, and the acquisition of Yamaki Renewable Energy further expanded its new energy business layout. ① Steady and healthy development of its own brand: the product strength of the company's own smart health brand “UOIN/Pomelo Print” and the smart care brand “ROZU/Rongzun” continued to increase, with sales exceeding one million units during the reporting period; the 3C digital battery brand “Mottcell/Yamaki” relied on the leading technical capabilities of the 3C digital lithium battery industry and had a wide range of customers and market shares at home and abroad; the new tea brand “Cha Xiaokai” product SKUs are constantly being enriched, sales channels are constantly expanding, brand content is constantly innovating, and consumers are constantly strengthening. By further strengthening its own brand building efforts, the competitiveness of its own brand continues to improve, contributing new value to the company's industrial upgrading. ② Developing new energy vehicle sales and service networks: In the critical process of accelerating the integration of smartphones and smart cars and the accelerated transformation of new energy vehicles to “new smart terminals”, the company relied on the appeal of senior channel brands, efficient sales and service network capabilities, rich store expansion and operation experience, perfect new retail IT system support capabilities, and excellent resource integration capabilities, established strategic partnerships with industry-leading NEV companies to build a three-dimensional NEV sales and service network, bringing the company's core competitive advantage in the field of smart terminal sales and services to NEV sales services The network has been further extended to achieve greater network value for digital sales services. ③ The acquisition of Yamaki Renewable Energy achieved upstream and downstream collaboration: On November 6, 2022, the wholly-owned subsidiary Shenzhen Aishide New Energy Industry Development Co., Ltd. acquired 51% of the shares of Shenzhen Yammu New Energy Technology Co., Ltd. with 76.5 million yuan in cash. The transaction was valued at 150 million yuan (= 76.5 million yuan in cash/ 51% of the shares). In Q1-Q3 2022, Yamaki New Energy achieved a net profit of 1.05 million yuan, corresponding to about 10-14 times PE (assuming no profit was generated in the fourth quarter). Yamaki New Energy lithium battery products are widely used in communication base station energy storage, indoor and outdoor energy storage products, industrial and consumer electronics products, etc., and have now reached the production scale of 960,000 Ah batteries and 4MWh battery assembly systems. Currently, Yamaki New Energy has synergies with the company's 3C digital, new energy vehicles, e-cigarette and other businesses at the business level and channel level, and the 3C digital battery brand “Mottcell/Yamaki” has a certain influence.

The listing on the new third board of the subsidiary Youyou Internet has been accepted and plans to increase it. According to the company announcement, on March 6, 2023, the subsidiary Youyou Internet restructured and established a limited company, applied for listing on the New Third Board, and applied for targeted distribution. The main business of Youyou Internet is mobile communication resale business, Internet of Things business, and MVNE partnership business. The fixed increase project plans to raise 10 million yuan, and the funds raised will be used for the construction of the Youyou Connect YouzhiCloud project. The Youyou Connect YouzhiCloud Project is committed to providing users with one-stop solutions for all IoT scenarios, integrating communication solutions and big data/AI solutions. We believe that after being listed on the New Third Board, Youyou Internet will still be a holding subsidiary within the scope of the company's consolidated statements. It will not affect the company's control of Youyou Connect, will have no impact on the company's financial status, operating results and ongoing operations, and will help increase the liquidity of the listed company's assets, enhance the influence of the company's brand power, and promote the rapid, sustainable and healthy development of Youyou Connect.

Risk factors: The listing of subsidiaries fell short of expectations; the risk that offline retail sales fell short of expectations due to repeated local outbreaks; the risk of worsening international relations and chip supply restrictions; the risk that demand for new energy vehicles fell short of expectations; the risk that new battery technology would impact the lithium battery industry; and the risk that the expansion of new cooperative brands and private brands fell short of expectations.

Profit forecast, valuation and rating: As a channel service provider with mobile phone sales as the main channel service provider, ESD's revenue and performance in 2022 were damaged during the pandemic. Against the backdrop of pressure on overall shipments in the smartphone industry and increased competition in the industry putting pressure on profit margins or putting pressure on profit margins, we lowered the company's 2023/24E net profit forecast to 1,282/1,526 billion yuan (the original forecast was 1,348/1,482 billion yuan), and the new 2025E net profit forecast for 2025E was 1,746 billion yuan, corresponding to the 2023-2025 EPS forecast as 1.03/1.23/1.41 yuan. The current price corresponds to PE 9.0/7.6/6.6 times. Comparing the comparable company Tianyin Holdings, Kids Wang, Baby-Friendly Room, and Huazhi Wine Store Wind, unanimously expected the 2023E 30x PE average valuation level. Aishida is currently 2023E 9x PE. The valuation is lower than the average valuation level of comparable companies, and they are optimistic about the company's investment value in the long run.