Description of the event

In Q1-Q3 of 2023, the company achieved revenue/net profit of net profit/net profit of 29.60/3.34/284 billion yuan, -12%/-38%/-42% of the same period last year; 23Q3 achieved revenue/net profit of 11.17/1.30/114 billion yuan, +3%/-32%/-37% of the same period last year.

Incident comments

23Q3: Total revenue also increased by 3%. It is expected that the main reason is that revenue from the engraving machine business increased better, and the revenue from the non-engraving machine business fell slightly year on year. Looking at splitting the engraver and non-engraver business, the revenue of the 23Q3 non-engraver business is expected to decline slightly year-on-year. Among them, revenue from e-cigarette and ebike products declined more, while revenue from the engraving machine business achieved high growth (the base is also low). By business, revenue from 23Q3 intelligent control components/health and environmental products/automotive electronics products is expected to increase year on year. Among them, revenue from intelligent control component products is expected to increase year on year, while revenue from innovative consumer electronics products is expected to decline year on year. 1) Innovative consumer electronics products: The engraving machine business ended with the removal of Cricut's downstream inventory. Revenue is expected to increase significantly month-on-month and year-over-year, and is expected to improve quarter by quarter; inventory pressure on electric bicycle (ebike) products remains, and revenue is expected to drop sharply year over year but improve month on month; e-cigarette product revenue is expected to drop sharply year on year, mainly because downstream customers are in a period of switching between new and used products, and shipments are under pressure. At the same time, Yingqu is shifting from precision plastic components to the supply of core heating modules and complete machines. 2) Intelligent control components: Revenue from water-cooled cooling control systems is expected to continue to rise, and Logitech's business has also achieved relatively rapid growth. At the same time, the acquisition of Shanghai Hengjing continues to generate revenue growth. 3) Health and environmental products: Revenue is expected to achieve positive year-on-year growth, but the growth rate declined more month-on-month compared to Q2. 4) Automotive electronics: Revenue is expected to continue to grow, but the growth rate is declining month-on-month.

Due to changes in product structure, gross margin declined year-on-year, and the reduction in exchange earnings led to a significant increase in financial expense ratios. In terms of profit margin, the 23Q3 company's gross marginal profit/net interest rate/ net interest rate after deducting non-net interest rate was -4.5/-6.2/-6.5pcts to 28.7%/11.7%/10.2% year on year.

The decline in gross margin is expected to be mainly due to changes in the product sales structure: 1) the share of revenue from e-cigarette products with higher gross margins declined; 2) the lower gross margin level of the acquired business of Hengjing. At the expense ratio level, the 23Q3 sales/management/R&D/finance expense ratio was -0.03/+0.3/-1.1/+4.6pcts year on year. The increase in the financial expense ratio was mainly due to a decrease in exchange earnings. At the beginning of '22, the company held more US dollar assets and brought more exchange earnings after $22Q2 appreciated, and related exchange earnings declined this year.

There is potential for growth in the medium to long term. It is optimistic that existing business will be steadily restored, new projects will be gradually released, and ongoing research projects will progress. The company's business focuses on various circuit segments. Automotive electronics products, e-cigarette products, water-cooled cooling control systems, and healthy environmental products have all shown good potential for development. With the continuous deepening of cooperation between the company and major customers and the steady progress of new product development, it is expected that they will continue to contribute revenue. In terms of the engraving machine business, inventory removal has basically been completed, revenue has improved markedly over year and month over month, and it is expected that it will continue to improve in the future. In terms of non-engraving machine business, at present, the company's e-cigarette products have successfully achieved the supply of “precision plastic components - core heating modules - complete machines”. In the future, along with the iterative completion of products from downstream customers, volume can be expected, and the gross margin of e-cigarette products is high, which is expected to increase the overall gross profit margin; at the same time, the company is expected to continue the replication path from parts supply to machine supply, and continue to increase its share and supply chain position among other downstream customers. Recently, the company announced that Hong Kong Yingqu, a wholly-owned subsidiary, plans to invest in the construction of an intelligent manufacturing base in Monterrey, Mexico, which is expected to further improve the company's global layout and expand business opportunities in the fields of automotive electronics and consumer electronics. It is estimated that the company's net profit for 23-25 is 5.2/65/ 850 million yuan, corresponding to PE of 28/23/18X.

Risk warning

1. Risk of exchange rate fluctuations;

2. Shortage of raw material supply and risk of price fluctuations.