Incident: Hongquan IoT released its third quarter results announcement on October 28, stating that revenue for the first three quarters of 2023 was about 292 million yuan, an increase of 62.7% over the previous year; net profit loss attributable to shareholders of listed companies was about 35.81 million yuan.
Revenue growth has accelerated, and operating capacity has improved. The company achieved revenue of 121 million yuan in Q3, an increase of 102.75% over the previous year; realized net profit of 12 million yuan, narrowing month-on-month losses. The company's Q3 R&D expense ratio, sales expense ratio, and management expense ratio decreased by 6.22pct, 2.60pct, and 1.51pct, respectively. We believe that the company's sales and management expenses are relatively rigid, and the input and output of R&D expenses are lagging behind, but Q3 already reflects the scale effect on the company's revenue side to a certain extent, and is expected to release profits along with further revenue growth. Furthermore, the company's operating capacity increased significantly month-on-month, and the number of inventory turnover days and the operating cycle decreased by 27 days and 24 days, respectively.
New product lines are gradually being mass-produced, and artificial intelligence algorithms continue to be iterated. According to the company's semi-annual report, in the first half of the year, the company's new products such as controllers and automotive instruments achieved great results. Relevant products have gradually entered the mass production stage, and mass production and sales of passenger car thermal management controllers have begun. In the development of artificial intelligence algorithms, the company has developed more algorithm functions suitable for commercial vehicles, such as seat belt wearing recognition, smoke monitoring, and steering recognition of mixing tanks; in addition, it has added functions such as voice recognition and surround view panoramic cameras in commercial vehicle human-computer interaction terminals.
Investment rating: The company is expected to experience a triple resonance between the recovery of the heavy truck industry, the increase in market share, and the increase in product unit prices. We expect the company to achieve operating income of 427/8.80/976 million yuan and net profit of 0.00/1.09/119 million yuan in 2023-2025, corresponding to 2024-2025 PE of 22/21 times, respectively.
Risk warning: industry recovery falls short of expectations; implementation of the new national standard for driving recorders falls short of expectations; controller product development and production falls short of anticipated risks; macroeconomic downside risks, etc.