Event: Fei Rongda released the mid-2023 report that the company's 23H1 achieved revenue of 1.778 billion yuan (year-on-year + 3.20%), net profit of 4.0189 million yuan (- 36.8251 million yuan in the same period last year, year-on-year turnround), and non-return net profit of-10.6629 million yuan (- 6899.51 million yuan in the same period last year). The loss narrowed year-on-year).

In a single quarter, 23Q2 achieved revenue of 1.005 billion yuan (year-on-year + 3.66%, month-on-month + 29.94%), net profit of 29.1429 million yuan (- 18.9264 million yuan in the same period last year), and non-return net profit of 23.8579 million yuan (- 2305.97 million yuan in the same period last year).

Communication business is under short-term pressure, and the share of new energy revenue continues to increase. In terms of application revenue composition, the company's 23H1 consumer electronics revenue accounts for 31 per cent (22H1 32 per cent), communications revenue 26 per cent (22H1 30 per cent), new energy (new energy vehicles, photovoltaic and energy storage, etc.) 33 per cent (22H1 22 per cent) and other categories 10 per cent (22H1 16 per cent). From a product point of view, the company's 23H1 thermal management materials and devices income 704 million yuan (year-on-year + 24.09%), electromagnetic shielding materials and devices income 461 million yuan (year-on-year-6.14%), lightweight materials and devices 222 million yuan (year-on-year + 54.65%).

The gross profit margin has improved significantly and the expense rate has declined. The company's 23H1 gross profit margin is 17.99% (year-on-year + 5.04pct), and in a single quarter, 23Q2 gross profit margin is 19.64% (year-on-year + 5.88pct, month-on-month + 3.78pct). This is mainly due to the company's continuous optimization of production processes, reduction of production costs, and the release of production capacity of some subsidiaries. Scale effect gradually appears. In terms of expense rate, 23H1's sales, management and R & D expenditure rates were 3.13%, 7.40% and 6.77% respectively, down by 0.10pct, 0.44pct and 0.68pct respectively compared with the same period last year.

Liquid cooling has a broad prospect, and the company has a good customer base and first-mover advantages. Under the background of the substantial increase in the demand for AI computing power, it is expected to give birth to a huge liquid cooling market. According to Sadie data, the market size of China's liquid cooling data center in 2025 is about 128.32 billion yuan, of which the market size of immersion liquid cooling data center is more than 50 billion yuan. The company has laid out the cooling devices and materials for many years, and the downstream customers in the data center and server field include Huawei, ZTE, Microsoft Corp, Cisco Systems, Chao, Xinhua 3, Facebook Inc, Google and other well-known domestic and foreign enterprises, and further strengthened the liquid cooling team in the first half of the year, which is expected to fully benefit from the rapid growth of the liquid cooling market.

Profit forecast and investment advice: we estimate that the company's income from 2023 to 2025 will be 5.041 billion yuan, 6.386 billion yuan and 7.71 billion yuan respectively, the net profit of returning mother will be 182 million yuan, 401 million yuan and 557 million yuan respectively, and the EPS will be 0.31,0.69,0.96 yuan respectively. With reference to the historical valuation of the company and the average valuation level of the comparable company, the company is given a dynamic PE range of 68-70X in 2023, corresponding to a reasonable value range of 21.39-22.02 yuan, with a rating of "better than the market".

Risk hint: market competition intensifies; capacity expansion is not as expected.