A leading connector company, ranking among the highest in the world in terms of overall ranking

The company specializes in the research and development of high-end optical, electrical and fluid connection technologies and products. The main products include electrical connectors and integrated interconnect components, optical connectors and optoelectronic equipment, fluid devices and other products, etc., accounting for 76.95%, 15.62%, and 7.43% of revenue in 2022, respectively. The company's products are widely used in high-end manufacturing fields such as defense, commercial aerospace, and new energy vehicles. The company ranked 12th in the overall ranking of the global connector industry in 2022, and the long-term goal of 2035 indicates that the world is first-class.

The quality of operations has been steadily improved. The company has raised its “14th Five-Year Plan” development goals in the face of the complex and changing external environment. The company insists on connectivity as its main business, aims at the expansion and expansion of strategic emerging industries, and continues to maintain the excellent operating quality of the industry. In the first three quarters of 2023, the company's revenue was 15.359 billion yuan, up 23.33% year on year; net profit was 2,884 billion yuan, up 26.64% year on year. The company's profitability increased steadily, with a gross profit margin of 38.79% and a net profit margin of 19.82% in the first three quarters of 2023. Among them, the gross profit margin for the third quarter was 40.53% and the net profit margin was 21.47%, all of which were the highest values in a single quarter in 3 years. In the middle of the year, the company raised its development goals for the post-14th Five-Year Plan period. It is expected that in the post-14th Five-Year Plan period, the company will maintain a high quality development trend of medium to high speed.

Focus on the main business, and the field of defense may usher in an inflection point in development

Industry beta: Affected by mid-term adjustments in the industry and other factors, the demand side of the industry showed a clear delay. The annual performance of some enterprises in the sector declined markedly year-on-year, and the company achieved steady growth in performance despite a sharp increase in incentive expenses this year. Judging from the fact that some companies in the sector have recently successively disclosed new orders, we believe that mid-term adjustments or implementation are imminent, and that orders in various segments may be gradually issued. Looking at the industrial chain, by analogy with 2020H2, upstream enterprises may be the first to see a reversal trend in industry recovery. As a core upstream component company, the company is expected to be the first to see a significant increase in orders over month.

Company α: The company continues to promote the “Comprehensive Defense Competitiveness Enhancement Project”, comprehensively guarantees production and delivery in the field of defense, strengthens project planning, and opens up the project support chain. The company has obvious R&D advantages. It has implemented more than 100 leading innovative projects every year, promoting rapid breakthroughs in a number of leading technologies such as high-speed, surfacing, and high-density optical transmission. The company's defense product business performance continued to grow steadily during the year, and scientific research orders were quite full. It is expected to provide good support for the subsequent increase in demand for defense products.

Exploiting new potential, industrial and civil businesses embark on a new journey of multiplication and development. The company continues to improve its specialized market development capabilities in high-end manufacturing directions such as new energy vehicles, communications, and industry. In the future, industrial and civil business is expected to double and develop rapidly.

In terms of new energy vehicles, the company was the first domestic connector company to intervene in the NEV industry, quickly seizing the market by relying on strong product technology transformation capabilities. This portion of revenue doubled in 2022. In 2023, the company achieved many breakthroughs in major domestic and foreign car companies. A number of projects were targeted during the year, involving mainstream domestic and international car companies and equipment platforms. The medium- to long-term growth trend of new energy vehicles is clear, and demand for localized replacement connectors is strong.

In terms of communications and industry, the company continues to promote the “Youmin Project”, focusing on the development of leading customers in the communications industry and the cultivation of high-quality customers, and unswervingly promoting customer and product restructuring. Continuously strengthening the cultivation of emerging businesses such as data centers, medical equipment, photovoltaic energy storage, and industrial equipment is expected to have a scale effect in the future.

In the civil aircraft business, the company actively provides supporting products and technical services for large domestic aircraft. The main supporting products include connectors and equipment racks. Many of the company's products have successively passed airworthiness certification and have been approved into COMAC's QPL catalogue, becoming the first domestic connector supplier to successfully support commercial aircraft.

Improve industrial layout and expand production capacity to support subsequent development

The company has planned and implemented a high-end interconnected technology industry community project and a civil aircraft and industrial interconnection industrial park project. At present, all of them have completed the general contract bidding for the project. The company's South China Industrial Base Project (Phase I) has officially been put into operation. Construction of the second phase of the project has begun, pushing the company's high-end manufacturing industrialization level to a new level; the main structure of the Luoyang Basic Devices Industrial Park project has been capped. It is expected that production capacity will be put into operation in early 2024, and production capacity will be released one after another along with the construction progress.

Profit forecast: The company has been deeply involved in the connector industry for more than 50 years to build a leading domestic military and civilian dual-use connector enterprise. Relying on the two-wheel drive for military and civilian goods, the company is expected to obtain excess profits from the dividends released by downstream demand in the industry. We forecast net profit for 2023-25 to be 33.53/44.01/5.507 billion yuan respectively, corresponding to PE of 22.36/17.04/13.62X. First coverage, giving a “recommended” rating.

Risk warning: the risk that military demand falls short of expectations, the risk of increased competition in the industry, and the risk of falling product prices.