Incident: The company released its results report for the third quarter of 2023. In the first three quarters of 2023, the company achieved revenue of 3.454 billion yuan, +14.36% year over year; realized net profit of 238 million yuan, +18.74% year over year; realized deduction of non-net profit of 216 million yuan, +37.21% year over year. On a quarterly basis, in Q3 2023, the company achieved revenue of 1,678 billion yuan, +86.06% year over month; realized net profit to mother of 112 million yuan, +87.17% year on year, +26.81% month on month; realized deducted non-net profit of 106 million yuan, +134.38% year over year and +36.37% month on month.

Benefiting from the increase in customer demand, Q3's performance was high year-on-month: the main reasons for the strong increase in Q3 in 2023:1) Entering the traditional peak season, consumer electronics demand picked up, new customer projects continued to be introduced, and orders grew rapidly; 2) Demand from customers such as Huawei, Xiaomi, and OPPO increased, and the capacity utilization rate of all bases was at a high level.

3) Automotive electronics continues to grow rapidly. In 2023, the company's gross margin was 17.54%, -1.85pcts, -0.99pct month-on-month; net margin was 8.00%, +0.05pct year-on-year, and +0.17pct month-on-month. Q3 The gross margin decreased year-on-month. We think it is mainly due to the increase in the share of material procurement revenue due to continuous investment and construction of overseas bases. In terms of expenses, the sales/management/R&D/finance expense ratios for the first three quarters of 2023 were 0.50%/5.84%/2.75%/-0.34%, respectively, -0.20/-0.71/-0.07/-0.82pct. Among them, the sharp decline in financial expenses was mainly due to an increase in interest income.

The consumer electronics boom has picked up, and the expansion of production capacity has supported performance: with the launch of many popular new products from Huawei, Xiaomi, and Honor since August, the popularity of the Chinese smartphone market has clearly picked up. According to IDC's monthly sales and retail sales data of Chinese mobile phones, the actual retail sales volume of smartphones in China continued the year-on-year growth trend in the first half of October. IDC expects China's smartphone market shipments to reach an inflection point in Q4 2023, achieving the first rebound in nearly 10 quarters. The company is the core supplier of Huawei. We believe that it will benefit from the strong return of Huawei. It is expected that the company's Q4 mobile phone orders will continue to grow, production line utilization will remain high, and the company's consumer electronics business is expected to grow rapidly in the second half of the year. In terms of production capacity, in order to cope with the rapid increase in customer orders, the company is now actively adding equipment and hiring additional personnel to meet the growing needs of customers. 1) Domestic: Production capacity construction at the Huizhou Phase III manufacturing base continues to advance. The Shenzhen Pingshan base is expected to start construction within this year, and it can be put into use in early 2025. 2) Overseas: India's Guanghong completed the expansion of production. In August, India's Guanghong mobile phone shipments reached 2.5 million units per month, a record high. Vietnam Guanghong has begun to provide manufacturing services for various high-end consumer, security, and new energy products to customers including Amazon and Yuneng Technology. Currently, the company is stepping up the construction of follow-up plants in the Vietnamese factory to meet the needs of new and old customers. As production sites are actively put into operation, we believe that sufficient supply of production capacity is expected to provide solid support for the company's performance.

Benefiting from customer orders, automotive electronics helps long-term growth: In the field of automotive electronics, the company has successfully entered the supply chain system of well-known auto parts suppliers Valeo, Continental, and Nippon Denso, providing customers with various automotive electronic components such as various sensors, car driving data recording systems, smart cockpit hardware, power management systems, etc., which are widely used in dozens of well-known domestic and foreign automobile brands, including Mercedes-Benz, BMW, Audi, Volkswagen, Tesla, Toyota, Geely, and BAIC, and many new energy vehicle brands.

The company and Huawei also have deep cooperation in the automotive electronics business. We believe that the recent popularity of pre-orders for many new models from Huawei is expected to provide a large elastic increase for the company's rapid growth in automotive electronics performance.

Raise the profit forecast and maintain the “gain” rating: Considering that the consumer electronics boom bottomed out in the second half of the year, the company's main mobile phone customer orders were full, production lines were running at full capacity, and production capacity was released in an orderly manner at home and abroad. The second growth curve, the automotive electronics business is gradually gaining strength, and the company's performance is expected to grow rapidly. We raised our profit forecast and estimated that the company's net profit from 2023 to 2025 was 443 million yuan, 596 million yuan, and 784 million yuan. EPS was 0.58 yuan, 0.78 yuan, 1.02 yuan, and 23-25 PE, respectively 51X, 38X, 29X, respectively.

Risk warning: the risk of fluctuations in the international political and economic situation, downstream demand falling short of expectations, new business expansion falling short of expectations, and the risk of rising labor costs.