2Q23 performance meets our expectations

The company announced 1H23 results: 1H23 achieved operating income of 728 million yuan, +13.02% year on year; net profit of 91 million yuan, +26.18% year on year. Corresponding to the company's 2Q23 revenue was 419 million yuan, +39.52% year on year, +35.60% month on month; net profit of return mother was 54 million yuan, +36.60% year on year, +41.95% month on month. The results were in line with our expectations.

Development trends

The automotive electronics business is steadily improving, and the new energy sector continues to contribute more and more. 1H23 Domestic passenger vehicle sales volume was +8.8% year-on-year to 11.268 million units, and new energy vehicle sales volume was +44.1% to 3.747 million units. Benefiting from the high boom in the automotive industry, the company's automotive electronics business continued to expand, with revenue +11.39% year-on-year to 499 million yuan, contributing 76.8% to main revenue. The company's consumer electronics business maintained steady growth, with revenue of +2.62% year-on-year to 150 million yuan. In particular, the company strategically lays out the new energy vehicle sector. The three-electric system has already entered the supply chain system of well-known parts suppliers and automakers such as United Electronics, Bosch, and Great Wall Motor, and there are deep barriers to entry. We believe that the company is accelerating the expansion of the product matrix and continuously optimizing the customer structure, and is expected to maintain a steady growth trend in revenue.

Profitability restoration has achieved remarkable results, and investment in technology research and development has increased dramatically. 1H23's gross margin was +4.0ppt to 33.79% year-on-year, and 2Q23's gross margin was +3.64pp/+1.36ppt to 34.37% year-on-year. The gross margin repair is mainly due to a certain drop in the prices of raw materials such as copper and plastic parts, and 1H23 consumes a lot of upfront inventory to reduce procurement costs. The 2Q23 management fee rate was 9.82%, +0.91ppt, and +0.88ppt compared to the previous month. The increase in management expenses was mainly due to the termination of equity incentives and accelerated exercise of rights and related expenses. The company continued to invest in new technology, with R&D expenses of +9.47% over the same period of time to 42.68 million yuan. Net operating cash flow was +102.49% year-on-year to 139 million yuan, highlighting the margin of safety. We believe that with the return of raw material prices to a reasonable range, combined with the release of scale effects and lean cost control, profit performance is expected to improve further.

Drive electric and intelligent Dongfeng to actively promote project development and mass production. The company's 58 new energy vehicles/intelligent driving and smart cockpit projects accounted for 36%/14%, respectively. Mass production of products such as battery management systems, hybrid transmission systems, sensors, and steering gears has all begun. Hexing Jiaxing received a capital injection of 70 million yuan, and the NEV parts fundraising project has officially started. We believe that by speeding up the layout of new energy and intelligent products, the company is expected to increase the value of bicycles and create a second growth curve.

Profit forecasting and valuation

Keep the 2023 and 2024 earnings forecasts unchanged. The current stock price corresponds to a price-earnings ratio of 26.2 times/22.9 times in 2023/2024. Maintaining an outperforming industry rating and target price of 19.30 yuan, corresponding to 29.9 times the 2023 price-earnings ratio and 26.1 times the 2024 price-earnings ratio, there is 14.1% upside compared to the current stock price.

risks

The development of new businesses fell short of expectations, and the decline in profitability exceeded expectations.