Event Overview:

The company announced a pre-increase in performance for the first half of 2023: Expected net profit of 116 million yuan to 126 million yuan for the first half of 2023, +45.54% to +58.09%; net profit of 91 million yuan to 101 million yuan after deducting non-return net profit of 91 million yuan to 101 million yuan, +27.97% to +42.04% year-on-year.

Analytical judgment:

Demand from downstream customers is strong, and the company's performance is being released at an accelerated pace

2023H1 expects net return profit of 116 million yuan to 126 million yuan, +45.54% to +58.09%; net profit not attributable to income is expected to be 91 million yuan to 101 million yuan, +27.97% to +42.04% year-on-year. According to the company's 2023 semi-annual performance pre-increase announcement, 23Q2 expects net return profit of 60 million yuan to 70 million yuan, +40.02% to +63.22%, and +8.45% to +26.42% from the previous month; net profit of non-attributable income is expected to be 40 million yuan to 50 million yuan, +8.89% to +35.87% year-on-year, and -20.32% to -0.57% from the previous year. On a median basis, the net profit for 2023H1 is expected to be 121 million yuan, exceeding the 0.94 to 104 million yuan previously predicted by the company in the listing announcement. We judge that the month-on-month increase in performance was mainly due to the continued increase in sales volume of new energy customers such as BYD and Tesla, which are major customers in the company's automobile business, and the steady growth of telecommunications business customers. The sales volume of BYD Q2 new energy passenger vehicles was 70,000 units, +98.1% and +27.8%, respectively. At the same time, combined with the company's continuous promotion of cost reduction and efficiency measures and the expansion of the energy storage business, the company's performance increased. In addition, 23H1 non-recurring profit and loss of approximately $25 million is mainly due to government grants and asset disposal income. We believe that with the continuous improvement of the company's independent R&D and innovation capabilities, the continuous expansion of scale effects, and the continuous enhancement of cost control capabilities, the company's profitability is expected to further improve.

Deepen Haitian long-term cooperation and accelerate the integrated die-casting layout

According to the announcement, the company recently signed a “Global Strategic Framework Cooperation Agreement” with Ningbo Free Trade Zone Haitian Zhisheng Metal Forming Equipment Co., Ltd. (“Haitian Zhisheng Metal”). The cooperation includes: (1) Merixin Company plans to purchase several Haitian Metal cold room die-casting small and medium-sized models, several large and oversized models within the next three years, and carry out R&D technical cooperation in the field of large-scale and oversized die casting. (2) Haitian Metal and Merixin will jointly develop a 20,000-ton cold chamber die casting machine. (3) Haitian Metal promises that all die-casting island equipment purchased by the company within three years will enjoy the most favorable business conditions from strategic partners. The company has a first-mover advantage in the field of integrated die-casting. It took the lead in purchasing 8,800T oversized die-casting machines in 2021; successfully tested the first integrated die-casting lower body structural parts at the Chongqing factory in June 2022; and successfully launched the company's oversized integrated battery pack die-casting parts in February 2023, marking that the company has fully mastered the core technology of the entire large-scale integrated die-casting process. The current strategic cooperation between the company and Haitian Metal will deepen the company's leading position in aluminum die casting. Continued mass procurement of die-casting machines over the next three years also shows the company's strong confidence in the future development of its lightweight business.

According to Guangdong Hongtu investor Q&A, the 12,000T oversized die-casting equipment can produce an integrated lower body/chassis for A00 class passenger cars. We believe that with the company's many years of technical accumulation in the die-casting industry and simultaneous development experience with leading OEMs, the strong partnership between the two sides is expected to take the lead in achieving a breakthrough in the 20,000T super-large die-casting field, giving more room for imagination in integrated die-casting.

The communications business benefits from increased 5G penetration and deep bonding, leading customer companies are among the earliest domestic enterprises involved in R&D, production and sales of aluminum alloy die castings for 5G base stations, and have a first-mover advantage in the field of 5G base station die castings. The company has mastered core technologies such as high-thin heat sink die-casting and high-thermal conductivity aluminum alloy material technology, and the share of 5G base station die-casting revenue continues to rise. According to Ericsson, by the end of 2022, the total number of global mobile contracts had exceeded 8.4 billion, and the number of 4G/5G mobile contracts was about 51/10 billion respectively, accounting for about 60%/12% of the total number of contracts, respectively. There is broad room for 5G penetration to increase.

On the customer side, the company is deeply tied to Ericsson and Huawei, which are leading communication base station equipment companies. Performance is expected to maintain steady growth with the increase in 5G penetration rate and the construction of small base stations.

It is proposed to set up a wholly-owned overseas subsidiary and the overseas travel process is accelerating

On June 7, the company announced that it intends to establish a wholly-owned subsidiary, Meritson International Inc. (Hong Kong) in Hong Kong, China, with an investment amount not exceeding HK$200 million. Meritson International Holdings Company (Hong Kong) will be established by Meritson International Holdings Company (Hong Kong), with an investment amount not exceeding HK$1.5 million. Meritson International Corporation (Hong Kong) and Meritson International Holdings (Hong Kong) jointly invested to establish Meritson North America (Mexico), with an investment amount not exceeding US$16 million. Meritson North America (Mexico) was established by Meritson North America (Mexico) in Delaware, North America, with an investment of no more than 15 million US dollars. The establishment of overseas subsidiaries marks the acceleration of the company's globalization strategy, which is conducive to the company's subsequent continuous development of overseas customers and production capacity expansion in the communications and automotive fields.

Investment advice

The company is deeply involved in precision aluminum alloy die castings. The automobile and communication industries are driving performance growth, and the customer structure is high quality. The automotive sector is linked to new energy leaders such as BYD and Tesla, and the communications sector has in-depth cooperation with Ericsson and Huawei. As downstream leaders grow, it is expected that the scale of revenue will rise. We maintain our profit forecast. We expect the company to have revenue of 40.5/48.3/6.06 billion yuan in 2023-2025, achieve net profit of 2.9/39/5.2 billion yuan, EPS of 1.37/1.83/2.47 yuan respectively. According to the closing price of 38.75 yuan on July 18, the corresponding PE is 28.3/21.2/15.7 times, respectively, maintaining the “buy” rating.

Risk warning

The recovery in the automobile market fell short of expectations, the increase in the penetration rate of new energy vehicles fell short of expectations, the construction of 5G base stations fell short of expectations, the expansion of new customers fell short of expectations, the establishment of overseas subsidiaries fell short of expectations, the expansion of new business fell short of expectations, the risk of increased competition in the industry, etc.