Performance review

2022 and 1Q23 results are in line with market expectations

Furong Technology announced 2022 results: operating income of 2,254 million yuan, up 17% year on year, and Guimu's net profit was 391 million yuan, up 33% year on year, in line with market expectations. Corresponding to the 4Q22 quarter, Furong achieved operating income of 595 million yuan, the same as the previous year, while Guimu's net profit was 64 million yuan, down 12% from the previous year. Meanwhile, Furong released 1Q23 results, achieving operating income of 417 million yuan, a year-on-year decrease of 32%, and Guimu's net profit of 84 million yuan, down 13% from the previous year, which is basically in line with market expectations. We believe that Furong's 4Q22 and 1Q23 operations are under pressure mainly due to 1) the continued decline in mobile phone shipments and inventory from leading brands such as Samsung, which led to a decline in revenue from Furong's related business; 2) the company's new plant in Luoyuan began a gradual rise in production capacity at the end of last year, and depreciation expenses dragged down the decline in profits.

Development trends

The high-end consumer electronics market layout is comprehensive, fully benefiting from the growth of folding screens. Furong's share of high-end 7 series aluminum used in flagship models such as Samsung's S series and folding screens is relatively stable. It actively exploited the market during the period when demand for laptop materials was strong, tied to leading technologies such as Apple, and continued to increase its share. Looking ahead, we are optimistic that Furong will cooperate with leading customers such as Samsung and Google in the folding screen field, promote casting, extrusion and heat treatment technology for new alloy materials based on existing 6 and 7 series metal research and development capabilities, and cooperate with the launch of high-end 7 series materials used in high-end tablets and laptops to help the company grow steadily over the long term.

Equipment technology innovation continuously improves product quality. Furong recently adjusted the production line. It already has automated production capacity for inspection and extrusion of mobile phones and laptops, and modified ingot heaters to improve heating uniformity, upgrade old equipment, and tap production capacity of the production line. At the same time, Furong made technical modifications to the small extruder to make it capable of producing 7 series products, and in order to improve the production efficiency of the main machine, the company purchased a new mold heater to replace the original equipment, making production more compact and continuous, and the efficiency improved markedly.

Long-term attention to the construction project of the Luoyuan Bay production base is expected to contribute to the company's continuous growth in the future. Furong Technology began investing in the Luoyuan Bay base in 2022. We believe that in the future, with the gradual recovery of the economy and smartphone demand and high-end trends, Furong is expected to meet the needs of more high-end customers with its 7-series aluminum supply capacity. Therefore, we are optimistic that by actively promoting capacity expansion, Furong will enhance the company's business capacity and scale, solve the problem of insufficient production capacity during the peak season, and is expected to introduce it to downstream customers other than consumer electronics in the future to promote the company's long-term growth.

Profit forecasting and valuation

Considering weak downstream demand and high depreciation pressure on the company's new production capacity, which dragged down overall profitability, we lowered Furong Technology's 2023e EPS by 33% to 0.78 yuan and introduced 2024e EPS of 0.92 yuan. The current stock price corresponds to 2023/24e 18.6/15.6x P/E. We maintain outperform industry ratings, consider the company's layout in new fields such as folding screens, and improve the valuation center. We lowered the target price by 13% to 18.0 yuan, corresponding to the 2023/24e 23.2/19.5x P/E. Compared with the current situation, there is still room for a 25% increase.

risks

The recovery in downstream demand fell short of expectations; the pace of production expansion and profit in Luoyuan Bay fell short of expectations.