2023Q3's revenue/net profit was +3%/-32% year-on-year, mainly due to the decline in e-cigarettes, ebikes and other businesses. However, engraver revenue was digested along with downstream inventory, and the positive trend in orders was clear. The company has accumulated deep technology in the field of intelligent manufacturing and continues to develop new cooperation projects with customers. The gradual mass production of the new projects is expected to drive a steady increase in the company's revenue. Dragged down by product structure and reduced exchange earnings, the company's net profit margin declined significantly. Maintain the “Overweight” rating.

Q3 Revenue/net profit was +3%/-32% year-on-year, and the performance fell short of expectations. The 2023Q1-Q3 company achieved revenue/net profit of 2.96 billion/330 million/280 million yuan of net profit after deduction of net income of 2.96 billion/330 million/280 million yuan, a year-on-year ratio of -12.1%/-37.8%/-42.3%, corresponding net interest rate of 11.27%/9.60%, year-on-year -4.65/-5.02pcts. Among them, the 2023Q3 company achieved revenue/net profit from net profit/non-return net profit of about 1.12 billion/130 million/110 million yuan respectively, about +3.2%/-32.5%/-37.1% year on year, corresponding to net interest rate of about 11.67%/10.17%, about -6.16/-6.52pcts year on year. The company's revenue growth rate was corrected year over year but fell short of expectations, mainly due to the decline in e-cigarette and ebike business, and product structure changes had a great impact on the company's profitability.

The engraving machine business is improving, and the e-cigarette business has fluctuated in the short term. Look at it by business:

1) Innovative consumer electronics: 2023Q3 achieved revenue of 360 million yuan, -32% year-on-year. Among them, carving machine revenue was 180 million yuan, +81%/+103% year-on-month respectively. As downstream inventory was digested, there was a clear positive trend in orders; e-cigarette business revenue was -55% to 0.9 billion yuan, mainly affected by IQOS 3.0 switching to 4.0 products that fell short of expectations and old products digested inventory; ebikes were also affected by dewarehousing and revenue of -76% to 0.5 billion yuan year-on-year. We believe that although the e-cigarette business has fluctuated in the short term, the prospects for cooperation between the company and PMI are good. With the gradual increase in IQOS 4.0 products and the decline in shipments of core heating modules and complete machines, the e-cigarette business is expected to resume a relatively rapid growth rate next year. The superimposed engraving machine business is gradually improving. The innovative consumer electronics business is expected to increase year-on-year in 2024.

2) Intelligent control components: 2023Q3 achieved revenue of 4.1 billion yuan, +59% year-on-year, mainly driven by the rapid repair of customer orders for water-cooled cooling control systems, the increase in orders for Logitech products, and the merger of Shanghai Hengjing. The company and customers continue to increase cooperation efforts. For example, the company's cooperation projects with Logitech Gaming are progressing in an orderly manner, and new cooperation opportunities have been opened up with Nestle in the fields of capsule coffee and pet food. With the gradual mass production and delivery of projects, we expect the intelligent control components business to maintain a good growth trend.

3) Automotive electronics business: 2023Q3 revenue was 120 million yuan year on year, +17% year on year. We judge that the decline in growth rate is related to the pace of downstream customer shipments. In the long run, we are still optimistic that the increase in electric vehicle penetration rate and customer expansion will continue to bring growth potential to the automotive electronics business.

4) Health and environmental products: 2023Q3 achieved revenue of 0.8 billion yuan, +1% year-on-year. The slowdown in growth compared to the first half of the year was mainly affected by overseas demand.

5) Technology development services: 2023Q3 achieved revenue of 0.3 billion yuan, +69% year-on-year.

6) Other products: 2023Q3 revenue was 110 million yuan, +28% year-on-year.

Product structure and exchange rates are dragging down net interest rates. The gross margin of 2023Q3 company was 28.74%, -4.46/-2.38pcts year-on-year respectively, mainly due to the impact of product structure. The share of 2023Q3's innovative consumer electronics revenue was -17pcts to 32% year-on-year. The 2023Q3 sales/management/R&D expense ratio was 1.78%/5.36%/8.17%, respectively, -0.03/+0.32/-1.09 pcts; the financial expense ratio was +4.63 pcts to 0.95% year over year, mainly due to a sharp decrease in exchange earnings year over year. The net interest rate of the 2023Q3 company was -6.16pcts to 11.67% year-on-year. We estimate that the impact of exchange profit and loss on net interest is about 0.5 pct.

Risk factors: Market demand for downstream customer products fell short of expectations; supply share of core customers declined; raw material prices rose sharply; exchange rates fluctuated greatly; new business development fell short of expectations; subsidiaries invested in mergers and acquisitions fell short of expectations.

Investment suggestions: As the company's Q3 performance fell short of expectations, we lowered the company's 2023-2025 revenue forecast to 4.22 billion/5.33 billion/6.23 billion yuan (original forecast: 4.82 billion/653 billion/7.63 billion yuan), and lowered the 2023-2025 net profit forecast to 51/780 million/900 million yuan (original forecast: 750 million/1.17 billion/1.26 billion yuan), corresponding to the 2023-2025 EPS forecast of 0.6/1.00/1.15 billion yuan. Combining comparable companies' 2024 PE valuations (Lixun Precision 16x, Goertek Corporation 27x, Toppan Shares 15x, Heertai 17x, based on Wind's unanimous expectations) and the company's historical valuation center range, we gave the company 19 times PE, corresponding to the target price of 19 yuan, maintaining the “increase in holdings” rating.