1H23 fell short of our expectations
Xinwei Communications announced 1H23 results: operating income of 3,345 million yuan, down 9% year on year; net profit of 194 million yuan, up 5% year on year; gross profit margin of 18.5%, which is basically the same as the same period last year. Corresponding to the 2Q23 single quarter, Xinwei achieved operating income of 1,608 million yuan, a 10% year-on-year decrease, and net profit of 48 million yuan, a year-on-year decrease of 23%, which is lower than our expectations. We believe that gross margin decline was mainly due to weak downstream demand in 2Q23, which dragged down the decline in gross margin, and increased R&D investment, which led to a decline in net interest rates.
Development trends
Maintain high R&D investment and expand the technological moat. 1H23 Xinwei invested 296 million yuan in R&D and applied for 253 new patents, including 120 5G antenna patents, 10 LCP patents, 20 UWB patents, 45 WPC patents, 48 BTB connector patents, and 10 MLCC patents. As of 1H23, 2793 patents have been applied for. The company continues to strengthen core material technology, refine the vertical integration capabilities of “materials → components → modules”, and improve the company's moat. We are optimistic that Xinwei will increase investment in R&D over the long term and achieve steady growth in performance through vertically integrated supply advantages from materials to modules.
Acquire Weishi Technology to improve the layout of the components industry. 1H23 Xinwei completed the acquisition of Weishi Technology. The company was founded in 2014 with acoustic technology as the core. Its products cover consumer electronics speakers, receivers, speaker modules, and audio and radio frequency modules. Downstream customers include Samsung, Huawei, Jingdong, and Wingtech. We believe that through the acquisition of Weishi Technology, Xinwei is expected to use the Weishi platform to provide acoustic devices to end customers such as consumer electronics and smart cars, enrich revenue sources, and enhance the company's performance, thus achieving steady growth. We are optimistic that the company will seize the acoustic business opportunities in the era of artificial intelligence and smart cars.
The new business is progressing smoothly, and its contribution to performance growth can be expected. The company's new business covers high-precision connectors, LCP modules/millimeter wave antennas, UWB, automotive interconnection products, passive components, etc., with high technical barriers. According to the company's announcement, in the field of high-precision connectors, Xinwei has made rapid breakthroughs in consumer electronics, commercial satellite communications, etc.; Xinwei LCP film and LCP high-frequency FCC have served major customers in North America. Xinwei UWB products have been used in IoT and smart home products such as smart door locks, smart security, and smart audio. In the field of automotive connectivity, Xinwei has obtained supply qualifications from domestic and foreign OEMs such as Tesla, Volkswagen, Mercedes-Benz, and Foxconn, as well as Tier 1, and its business scale continues to expand. We are optimistic that Xinwei's new business will continue to develop in the future, grow rapidly in the fields of satellite communications, automotive electronics, etc., and contribute to increased revenue and profit.
Profit forecasting and valuation
Considering weak downstream demand and increased R&D investment in 2023, we lowered 2023e EPS by 6% to 0.79 yuan, maintaining 2024e EPS at 1.00 yuan. The current stock price corresponds to 2023/24e 21.4/16.9xp/E. We maintain our outperforming industry rating. Considering the positive development trend of Xinwei's new business, the valuation center is moving upward. Based on the profit forecast for 2024, we raised our target price by 16% to 22.0 yuan, corresponding to 2024e22.0x P/E. Compared with the current 27% increase.
risks
Demand for downstream terminals for consumer electronics and smart cars fell short of expectations; new business customer development fell short of expectations.