Incidents:

On August 15, 2023, the company released its 2023 semi-annual report. In the first half of 2023, it achieved operating income of 1,016 billion yuan, -5.00% year-on-year, net profit of 0.27 million yuan over the same period, +641.31% year-on-year, and realized net profit of 110 million yuan after deducting non-homecoming net profit of 110 million yuan, +160.80% year-on-year.

Product structure optimization promotes significant improvement in profitability

The company's revenue in the first half of the year fell slightly year on year, mainly due to a decline in household sewing machine motor sales revenue. The company's net profit turned a loss into a profit, mainly due to 1) the increase in sales share of products such as flat wire motors and 800V high-voltage drive motors, driving the improvement of the drive motor business structure; 2) promoting an increase in the gross margin of intelligent controller products through many measures such as manufacturing process optimization, product technology plan improvements, and research and development and industrialization of new project products; 3) an increase in the sales share of intelligent controller products with high profitability.

The company's gross profit margin in the first half of the year was 15.44%, +4.15 pct, net profit margin of 2.63%, +3.38 pct year on year.

New targets have been obtained and production capacity released, and performance is expected to grow rapidly

In the first half of the year, the company obtained a fixed location for an electric drive project of Ideal Automobile, and also signed a strategic cooperation agreement with Xiaopeng Motor, further enriching the company's customer resources in the field of new energy vehicles. The company's drive motor production capacity continues to increase. Currently, Zhejiang Lishui plans to build a new drive motor project with an annual output of 1.8 million units and part of its production capacity has been put into mass production. The first phase of the project with an annual output of 800,000 units of 3 million drive motors in Deqing, Zhejiang has completed the main plant construction, and some production lines have also been mass-produced. As the company continues to advance in terms of project targeting and production capacity, the company's performance is expected to grow rapidly.

Downstream demand was strong, and the intelligent controller production capacity layout continued to be optimized. In the first half of the year, demand from smart controller customers such as Covos and Tianke was strong. Intelligent controllers achieved revenue of 344 million yuan, +7.26% over the same period. The company has promoted the improvement of the profitability of intelligent controllers through various measures, making a major contribution to performance growth. In the first half of the year, the company set up a subsidiary in Vietnam and completed production line construction and customer certification. In 2022, it built an East China production base in Deqing, Zhejiang, and began mass production. The company will form three intelligent controller production bases in East China, South China and Vietnam to help further improve its performance.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2023-2025 to be 24.61/38.31/5004 billion yuan respectively, with a year-on-year growth rate of 5.57%/55.68%/30.64% respectively, a three-year CAGR of 29.01%, net profit of 1.03/2.02/308 billion yuan respectively, a year-on-year growth rate of 143.96%/96.41%/52.62% respectively, and EPS of 0.21/0.40/0.62 yuan/share, corresponding PE is 31.4/16.0/10.5 billion yuan respectively times. Based on the relative valuation and absolute valuation results, we gave the company 25 times PE in 24 years with a target price of 10.00 yuan to maintain the “buy” rating.

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