Incident: On April 25, 2023, the company released its 2022 annual report and the first quarterly report of 2023. It achieved total revenue of 387 million yuan in 2022, a year-on-year decrease of 13.92%, a year-on-year net profit of 70 million yuan, a year-on-year decrease of 32.97%, and net profit of 62 million yuan after deducting non-return mother's net profit of 62 million yuan, a year-on-year decrease of 12.43%. In Q1 2023, the company achieved total revenue of 94 million yuan, an increase of 53.83% over the previous year, achieved net profit of 0.9 billion yuan, an increase of 374.6% over the previous year, and achieved net profit of 108 million yuan after deducting non-return mother's net profit of 08 million yuan, an increase of 1061.13% over the previous year.

Comment:

Revenue and profit increased year-on-year in the first quarter, and business revenue continued to rise. According to the company announcement, the company achieved revenue of 102 million yuan in Q4 2022, a decrease of 8.97% over the previous year, achieved net profit of 20 million yuan to the mother, an increase of 52.15% over the previous year, and achieved net profit of 17 million yuan after deducting non-Gumi's net profit of 17 million yuan, an increase of 112.90% over the previous year. Looking at the whole year, the company mainly performed well in three areas: R&D investment, product innovation, and overseas expansion:

1) Continuous R&D: The company attaches great importance to technological innovation. The company continues to increase R&D investment in key core technologies and new products and technologies. In 2022, the company invested 554.842 million yuan in R&D, an increase of 12.92% over the previous year, and R&D investment accounted for 14.34% of revenue; the company's IG502 edge computing gateway product received an honorary nomination award in the 35th “Engineers'ChoiceAwards (Engineers'ChoiceAwards)” award in the US industrial control industry. The company's enhanced industrial-grade edge computing gateway, high-precision transients The waveform fault indicators, etc. obtained the “Beijing New Technology and New Product (Service) Certificate” issued jointly by six departments including the Beijing Municipal Science and Technology Commission and the Municipal Development and Reform Commission.

2) New products have been introduced, and edge computing products are growing rapidly: Faced with the market's digital intelligence demand, the company's product lines have launched a series of new products and solutions for the commercial, industrial energy and vehicle transportation industries, including ER605 edge routers, VT200 simple vehicle tracking gateways, etc. The company's market expansion of edge computing gateways, vehicle gateways, low voltage power distribution gateways, edge routing and other products is beginning to bear fruit. Among them, edge computing gateways and vehicle gateway products are growing rapidly.

3) Continued overseas market expansion: The company continues to expand overseas markets, mainly in developed industrial countries, and has obtained a European invention patent. The company's revenue scale in overseas markets continues to grow. The company's new products, in-vehicle gateways and Xinghan Cloud management network solutions, have entered markets such as North America and Europe, and are expected to generate large-scale sales.

In terms of revenue structure, the share of overseas business has further increased. The company continued to develop domestic and overseas business and continuously increase its market share. Domestic revenue in 2022 was 243 million yuan, down 18.32 percentage points from the previous year, accounting for 63% of revenue, down 3 percentage points from the previous year; overseas revenue in 2022 was 141 million yuan, down 4.41% from the previous year, accounting for 37% of revenue, up 3 percentage points from the previous year, mainly due to the steady progress of the company's internationalization strategy. With the gradual expansion and implementation of products in overseas markets in recent years, overseas business grew rapidly. In the future, the company is expected to continue to increase the development of overseas business, continue to promote overseas market expansion plans for core products and business lines, take advantage of the overseas advantages of Chinese products, increase the return on investment of overseas products, feed back R&D and operation, and form a virtuous circle.

Gross margin increased in 2022, and overall profitability was stable

Judging from profitability, the company's annual gross margin and net interest rate were stable overall, and gross margin increased in 2022. The company's gross margin in 2022 was 48.08%, up 2.83 percentage points from the previous year, and the net interest rate in 2022 was 18.19%, down 6.12 percentage points from the previous year. In the first quarter of 2023, the company's gross margin was 47.86%, down 1.65 percentage points from the previous year, up 1.08 percentage points from the previous year. The company's net profit margin was 9.52%, down 10.03 percentage points from the previous month, and up 6.30 percentage points from the previous year.

There was a slight increase in the overall cost rate in 2022, and the cost rate declined in the first quarter of '23 compared to the same period

Looking at the cost side, the company's expense rate increased slightly during 2022, and the expense rate declined in the first quarter of '23 compared to the same period last month. The company's expense rate during 2022 was 33.08%, an increase of 5.36 percentage points over the previous year. Among them, the sales expense ratio was 15.20%, an increase of 4.03 percentage points over the previous year, mainly due to the increase in employee remuneration. The management expenses ratio was 6.26%, and the financial expenses rate was -2.72%. Financial expenses were mainly due to an increase in exchange income due to an increase in exchange rate. In the first quarter of 2023, the company's expenses ratio was 37.23%, down 4.92 percentage points from the previous month and 8.66 percentage points from the previous year. Among them, the sales expenses ratio was 14.89%, the management expenses rate was 7.45%, and the financial expenses rate was 1.06%.

Maintain investment in R&D and continuously enhance technological innovation capabilities

The company attaches great importance to technological innovation, maintains high investment in R&D, and lays a good foundation for subsequent development. In 2022, the company's R&D expenses were 55 million yuan, an increase of 12.90% over the previous year, and the R&D expenditure rate was 14.34%, an increase of 3.42 percentage points over the previous year; in the first quarter of 2023, the company's R&D expenses were 13 million yuan, and the R&D expenses rate was 13.83%, a decrease of 1.86 percentage points over the previous year, a decrease of 4.51 percentage points over the previous year. Overall, the company continuously invests in R&D to further promote technological innovation and development, and lay a solid technological foundation for the company's long-term development.

The company's R&D system continues to expand and improve, and the number of R&D personnel in the company continues to rise. As of the 2022 financial report, the total number of employees in the company was 407, of which 178 were R&D personnel, accounting for 44% of the total number. The continuous growth of the company's R&D team provides an effective guarantee for subsequent new product development, new business development and related after-sales support activities.

The space for the Internet of Things for electricity is vast, and the intelligent transformation of distribution grids is the key power IoT. China Southern Power Grid's “14th Five-Year Plan” plans to invest about 670 billion yuan, of which the distribution grid side invests about 320 billion yuan, accounting for 48% of the total investment. We initially estimate that the total planned investment of the national power grid is expected to reach 3 trillion yuan during the “14th Five-Year Plan” period. Among them, intelligent distribution network transformation is an important part. The third-generation power system is a new type of power system mainly based on new energy. The focus is on upgrading the distribution network system, and intelligent distribution networks have become a development trend in the industry.

IWOS is the “camera” of the new power system and the “starting point” for intelligent distribution networks

As the process of the new power system progresses, the proportion of new energy sources such as wind power and photovoltaic power generation will increase significantly. The power system faces the “double height” problem, that is, high-ratio renewable energy access and high-ratio power electronic equipment applications. Digital technology has become the key to solving the “double height” problem, and the recording waveform fault indicator (IWOS), as an “eye” in the intelligent process, can accurately measure line current and record waves at high speed when a circuit system fails, diagnosing the type of line fault and quickly solving the problem. It can “protect” the stable operation of the distribution network side. The “starting point” of intelligent power grids.

The company's IWOS products have core competitiveness. IWOS, a leader in intelligent distribution networks, consists of three systems: a collection unit, a collection unit, and an intelligent analysis cloud platform. The three components are all independently developed and designed by the company. The fault detection accuracy rate has reached 90% (the accuracy rate of traditional products is below 50%). At the same time, the company has its own database and has strong competitive strength. Since 2017, IWOS has entered power grid markets in various provinces and cities across the country. It has been applied in more than 23 provinces and cities of the National Power Grid and China Southern Power Grid. Tens of thousands of sets of equipment have been installed, covering thousands of lines. At the same time, the company is committed to expanding overseas markets and is currently piloting in more than a dozen overseas countries or regions.

Deeply involved in the industrial Internet of Things and smart grids, with both hardware and software capabilities

The company's main products include industrial IoT communication products and IoT innovative solutions. Among them, industrial IoT communication products mainly include industrial wireless routers, wireless data terminals, edge computing gateways, industrial Ethernet switches, etc., while IoT innovative solution products mainly include intelligent distribution network condition monitoring system products, intelligent sales control system products, and smart Internet of Vehicles system products. In the field of intelligent power, the company's DTU products serve the automated transformation of national power grid distribution networks, and demand is highly certain. The company has both hard power and soft power. Continued investment in R&D maintains the company's technological leadership in the industry, while continuously improving marketing channels, so that brand influence continues to increase, laying the foundation for long-term growth.

Profit Forecasts and Investment Ratings

As a leading enterprise in intelligent distribution networks, the company is deeply involved in IWOS, DTU and other products. At the same time, it also has a lot of room for future growth with the Industrial Internet of Things. We expect the company's net profit for 2023-2025 to be 102 million yuan, 145 million yuan, and 199 million yuan respectively. The corresponding PE will be 31.72 times, 22.21 times, and 16.19 times respectively, maintaining the “buy” rating.

risk factors

Changes in the scale of investment in the power industry; increased competition in the IoT industry triggered a price war; progress in intelligent power grids fell short of expectations