Q3 performance basically meets our expectations

The company announced its 1- 3Q23 performance, with revenue of 2.96 billion yuan, down 12.1% and net profit of 330 million yuan, down 37.8%. Quarterly, 1Q/2Q/3Q23 revenue was-32.5%/-2.3%/+3.2% year-on-year respectively, and net profit from parent decreased by 48.4%/34.5%/32.5% respectively. Q3 performance basically met our expectations.

Trend of development

1. Circut engraving machine returns to growth, Ebike electric moped interactive system, new tobacco and other categories or short-term pressure. Q3 products, we expect: 1) innovative consumer electronics revenue may still be under pressure, mainly due to the high downstream inventory of Ebike control system and other products, and IQOS shipment products from plastic parts to core modules and complete machines transition, related customers short-term orders weak, Circut engraving machine with the channel inventory near the end of the superposition of last year's low base impact, year-on-year or recovery growth; 2) Intelligent control component products are expected to grow rapidly, among which water-cooled heat dissipation products and Logitech orders grow rapidly, and Shanghai Hengjing consolidated contribution increment;3) Automotive electronic products are expected to continue to grow, and the growth rate of subsequent intelligent control modules, smart cockpits and other products is expected to improve;4) Revenue from healthy environment products grows steadily year-on-year or maintained.

2. Under the change of product structure, the gross profit rate is under short-term pressure, and attention shall be paid to the improvement trend of subsequent profitability. The gross profit margin of Q3 of the Company reached 28.7%, with a year-on-year/month-on-month decrease of 4.5ppt/2.4ppt respectively, mainly due to the short-term drag of the decrease in the proportion of high-margin businesses such as new tobacco and the integration of Shanghai Hengjing. On the expense side, Q3 Company's sales/management + R & D/financial expense ratio was flat/-0.8ppt/+4.6ppt respectively year-on-year. Under the comprehensive influence, the net interest rate of Q3 parent of the company reached 11.7%, down 6.2ppt at the same time. We expect that with the improvement of shipments of new tobacco core modules and complete machines, and the recovery of growth in automotive electronics and health environment businesses, the subsequent business structure optimization is expected to drive profitability improvement.

3. Pay attention to the follow-up new tobacco order repair, engraving machine, automobile electronics and other multi-business recovery growth trend. We expect: 1) engraving machine: At present, the inventory of overseas channels has fallen back to normal water level, and the mass production of new products is expected to drive the continuous growth of revenue;2) New tobacco: The supply of the company and large customers is stable, and the core module and complete machine products are deeply cooperated. With the increase of IQOS market share in the global HNB and the volume of new products, the follow-up orders of the company are expected to improve;3) Automotive electronics: Under the background of booming supply and demand, the company is expected to continue to grow rapidly by virtue of continuous R & D innovation and deep cooperation with large customers. The Company also vigorously promoted technology development and expanded the expansion of pet, food, new energy and other fields, which is expected to usher in the harvest period in the future.

Profit forecast and valuation

The 23/24 year earnings forecast remains unchanged, and the current stock price corresponds to 26/18 times P/E in 23/24 years. Maintain the outperform rating and target price of 21 yuan unchanged, corresponding to 30/21 times P/E in 23/24 years, with 15% upside space compared with the current stock price.

Risk

Risk of loss of orders from major customers, significant fluctuations in exchange rates, and new product development less than expected.