3Q23 performance is in line with our expectations

Company announcement: 1-3Q23 achieved revenue of 1,081 million yuan, an increase of 8%; net profit of 155 million yuan, a decrease of 15%, and non-net profit of 127 million yuan, a decrease of 24%. Among them, the 3Q23 company's revenue was 363 million yuan, up 11% year on year; net profit was 51 million yuan, up 7.3% year on year, and net profit after deducting 41 million yuan of non-net profit, down 7.1% year on year, in line with our expected development trend

The company's core products, PLC and servo business shares continue to rise, and servo continues to become an important growth point.

According to MIR data and our estimates, the company's overall servo business is expected to achieve a year-on-year growth rate of about 20% during the 1-3Q23 period, and the small PLC business as a whole is expected to remain the same year over year. We have seen a further significant increase in the market share of the company's overall business. According to MIR data, 3Q23's servo business market share was about 3.5%, up 0.3ppt month on month, up 0.5ppt year on year; the company's small PLC market share was about 8.2%, up 1.7ppt month on month, up 2.2ppt year on year. The market strategy of selling PLC with servo continues to drive growth in performance.

The company continued to launch new products during the reporting period, bringing new growth momentum. During the 2023 Industrial Fair, the company launched a blade-type controller & IO system, a VH1 series open-loop vector inverter, an EV-CE on-board controller, and a touch screen. Overall, the product iteration cycle of local industrial control manufacturers is shorter, and the company continues to introduce new products and carry out product-side upgrades and iterations during a period when market demand is relatively low. Therefore, we believe that the company is also expected to usher in greater performance elasticity when demand is rising.

There was an improvement in gross margin in 3Q23. The company's accounts receivable turnover days increased due to the relaxation of account policies for research on key customers and distributors. During the 3Q23 period, the company benefited from declining material costs and cost reduction and efficiency measures. The company's gross margin recorded 35.3%, an improvement of 1.2ppt over the previous year, and an improvement of 0.9ppt over the previous year; however, due to the company's continued focus on breaking through major customers and core dealers, the company granted a more relaxed account period. We saw that the company's accounts receivable turnover days in 3Q23 recorded 29.33 days, an increase of 2.96 days over the previous year, and 11.81 days over the previous year.

Profit forecasting and valuation

Due to pressure on the 3Q23 fee ratio and increased development investment in key clients, we lowered our 2023/24 net profit by 6.6% and 6.6% to 2.0/260 million yuan, corresponding to a price-earnings ratio of 26.6/20.7x in 2023/24. Maintaining an outperforming industry rating and a target price of 45 yuan, corresponding to a price-earnings ratio of 31.4/24.4x in 2023/24. Compared to the current stock price, there is still room for 18% increase.

risks

Downstream demand fell short of expectations, industry competition intensified, and gross margin declined.