Incident: The company released the first quarter report of 2023 on April 27. 1Q23 achieved revenue of 640 million yuan, a decrease of 23.9% over the previous year; the net profit of the mother was 130 million yuan, a decrease of 34.8% over the previous year; after deducting non-net profit of 120 million yuan, a decrease of 35.0% from the previous year. The performance was in line with expectations.

1Q23 gross margin reached a record high for the same period; the advantage of scale effect is obvious. The company's comprehensive profitability increased for two consecutive years. In 2022, gross margin increased 6.9 ppt to 42.4% year on year; net interest rate increased 2.6ppt to 23.2% year on year, and gross margin and net interest rate both reached record highs. 1Q23 gross margin was 41.5%, up 0.8ppt year on year, up 0.8ppt year on year, for three consecutive years and a record high for the same period; net interest rate was 19.9%, down 3.5ppt year on year, mainly due to higher expense rates.

The increase in the cost rate during the period affected the net interest rate; operating cash flow improved significantly. The cost rate for the 1Q23 period increased 5.4 ppt to 17.4% year on year. Specifically, 1) the sales expense rate increased 1.9 ppt to 4.9% year on year; 2) the management fee rate increased 2.6 ppt to 8.1% year on year; 3) the financial expense rate was 0.9%, compared to 1.1% in the same period last year; 4) the R&D expense rate increased 1.1 ppt to 3.5% year over year. By the end of 1Q23, the company: 1) accounts receivable and notes were $1.96 billion, a decrease of 12.2% from the beginning of the year; 2) prepayments amounted to $0.2 billion, a decrease of 8.8% from the beginning of the year; 3) inventory amounted to $1.31 billion, an increase of 5.6% over the beginning of the year; 4) contract liabilities of $0.3 billion, a decrease of 58.7% from the beginning of the year.

1Q23, the company: 1) Net cash flow from operating activities was $43 million, compared to $240 million in the same period last year, mainly due to increased sales payback and a decrease in purchase payments; 2) Net cash flow from investment activities was -301 million yuan, compared to -4.2 billion yuan for the same period last year; 3) Net cash flow from fund-raising activities was -90 million yuan, compared to 210 million yuan for the same period last year.

Rooted in the industry for more than 30 years; laid out three major business segments. 1) Benefiting from the rapid development of domestic alternative drivers, special electronic components, 5G communication, etc., the company's self-produced components sector developed steadily. 2) The company maintains long-term cooperation with internationally renowned manufacturers in the trade sector, and has strong advantages in product selection and delivery speed. In 2022, it will vigorously promote the Southeast Asian market layout as a driving force for later performance growth. In 2023, it will gradually use the strategic layout of the Southeast Asian market to create benefits and promote the company's international trade process. 3) The company has mastered a series of proprietary technologies for the industrialization of CASAS-300 special ceramic materials through exclusive technology licensing. It is the first of its kind in China and the technical level is leading. As one of the few domestic enterprises with large-scale production capacity for ceramic materials, product performance and production capacity already have stable supply capacity. The new materials sector has asset-heavy properties and is expected to drive up profitability after scale effects are realized.

Investment suggestions: The company is a leading specialty MLCC enterprise. It has been deeply involved in the industry for more than 30 years, and components have developed steadily; ceramic-based composites have large-scale production capacity, which is expected to open up new space for growth; international trade expansion in the Southeast Asian market will gradually create benefits. At the same time, the company cooperates with professional investment institutions to set up industrial funds to promote the downstream development of new materials and achieve a virtuous cycle in the industrial chain. We expect the company's net profit from 2023 to 2025 to be 980 million yuan, 1.23 billion yuan, and 1.50 billion yuan respectively. The current stock price corresponding to PE from 2023 to 2025 is 18x/14x/12x. Considering the company's position in the industry and new business growth, we gave 23 times PE for 2023, 2.14 yuan/share for EPS in 2023, corresponding target price of 49.22 yuan. Maintain a “Recommended” rating.

Risk warning: downstream demand falls short of expectations, new product development falls short of expectations