Event: The company released the 2023 Restricted Stock Incentive Plan (draft). Comments on this are as follows:

Stock incentives bind core personnel and boost confidence in future development. On November 30, the company announced the 2023 restricted stock incentive plan (draft). The number of restricted shares to be granted under this incentive plan is 8.8 million shares, accounting for 2.19% of the company's total share capital at the time of the announcement. The number of incentive recipients granted for the first time in this incentive plan is 127 people, including directors, senior management, middle management, and core technical (business) personnel working for the company when the company announces this incentive plan. The initial grant price for restricted shares is $8.89 per share. The performance conditions for lifting restrictions on restricted stock sales granted for the first time in this incentive plan are: based on net profit from the mother in 2022, the net profit growth rate of the parent in 2024/2025/2026 was not less than 80%/120%/160%, respectively, and the net profit to the mother for that year was 4.70/5.75/679 billion yuan, respectively.

Q3 Performance was high, and gross margin improved over the same period last month. In the first three quarters, the company achieved operating income of 2.194 billion yuan, down 11.76% year on year; net profit of 304 million yuan, up 32.85% year on year; net profit after deducting 290 million yuan, up 12.44% year on year. Among them, Q3 achieved operating income of 799 million yuan, an increase of 3.14% over the previous year; net profit of 184 million yuan, an increase of 151.88% over the previous year; and net profit after deducting 157 million yuan, an increase of 82.65% over the previous year. Q3 The rapid increase in performance was mainly due to the increase in investment income and the reduction in income tax expenses in the current period. 1) Health hardware IDM business profit growth is steady. In the first three quarters, the company's health hardware IDM business achieved revenue of 2.162 billion yuan, down 10.27% year on year; net profit was 380 million yuan, up 14.28% year on year. The “Songlin Family” business achieved operating income of 3,06643 million yuan, a year-on-year decrease of 58.36%; net profit of the mother was 75.9526 million yuan, an increase of 26.73% over the previous year. 2) Q3 gross margin improved month-on-month.

The company's gross margin/ net profit margin for the first three quarters was 35.07/ 15.26%, up 5.04/5.50pct from the previous year, respectively. We judge that this is mainly due to improvements in product structure. Among them, Q3 gross margin/net profit margin was 36.39/ 24.89%, up 5.01/14.65pct year-on-year, respectively, and 1.48/14.13pct, respectively. 3) Cash flow has remained at a good level, and the expense ratio has increased. The company's net operating cash flow for the first three quarters was 299 million yuan, a year-on-year decrease of 40.53%. The fee rate for the period was 19.24%, an increase of 2.99pct over the previous year. Among them, the sales/management (including R&D) /finance expense ratios were 4.41/15.21/ -0.39%, respectively, with year-on-year changes of -0.66/+2.12/+1.52pct.

Divestment of “Songlin Family” and focus on the development of the main business. On August 29, the company announced that it plans to transfer 100% of Songlin Home's shares to Songlin Investment at a transfer price of 195 million yuan. The divestment of the “Songlin Family” business is mainly based on focusing on the strategic development planning needs of the main business, further concentrating superior resources to improve and strengthen the “Health Hardware IDM” business. The net profit of Songlin Home Furnishing in 2022 was -109 million yuan, and on July 31, 2023, it was -47 million yuan. Transferring shares of Songlin Home Furnishing is beneficial to raising the company's profit level.

Investment advice: Stock incentives boost confidence, make strategic plans more clear, and maintain an increase in holdings rating. The company's net profit from 2023 to 2025 is estimated to be 3.95, 4.82, and 584 million yuan, respectively, up 51%, 22%, and 21% from the previous year, with corresponding valuations of 18, 15, and 12 times, respectively. The company is deeply involved in the health hardware IDM business, with the goal of creating an invisible IDM champion in segmented categories; after the divestment of “Songlin Home”, the business is more focused, and future growth can be expected.

Risk warning: risk of increased industry competition; risk of raw material price fluctuations; risk of downturn in downstream demand; risk caused by trade friction and exchange rate fluctuations, etc.