1. A sentence of logic

As a UDM manufacturing leader in the field of innovative consumer electronics, Yingqu Technology has seen a rise in the supply chain position of the e-cigarette business, the boom in downstream demand has driven revenue beyond expectations, and the cost rate has declined considerably due to personnel optimization+scale effects.

II. The logic of exceeding expectations

The main performance that exceeded expectations came from the increase in revenue from the e-cigarette business that exceeded expectations, and the company's overall net interest rate increased.

1. E-cigarette business revenue exceeded expectations: rapid delivery of new cost-effective products+US market growth.

Market expectations: In the past, Yingqu Technology's e-cigarette business mainly focused on plastic parts, but the new product, Iluma, used very little plastic parts. Although the whole machine business can contribute to growth, it is difficult to expect a significant increase in 2024 under the current market.

We forecast:

1) Expansion of high-value categories: whole machine+core heating component products. With years of in-depth cooperation with customer PMI, the company was upgraded from a second-level plastic parts supplier to a first-level supplier of complete machines in '23, and core heating components also became an important supplier. We judge that the shipping value of a single set of tobacco products has increased significantly, yet the impact of the decline in the value of plastic parts has been reflected in '23, and there is no need to worry in '24.

2) The number of units shipped exceeded expectations. Driven by 1: The new model is cost-effective and portable. In March '22, PMI introduced a new cost-effective Iluma One product to the market. It is priced at 3,980 yen in the Japanese market (regular model is 6980 yen, the price is 43% lower), and is presented as a very portable and compact all-in-one (the regular model is a splitter, and the cost is higher), which quickly became Iluma's main selling model. We judge that this product will still be an important driver for PMI to expand its consumer base and seize rival share in 24, which is expected to drive sales beyond expectations.

3) The number of units shipped exceeded expectations. Driven by 2: Increased contribution to the US market. According to the PMI announcement, the company plans to commercialize IQOS in the US market in 2024Q2. The US is a major consumer of tobacco. According to CDC data, the number of adult tobacco users in the US reached 46 million in 2021. Assuming a 10% penetration rate (see that the 23Q3 share of the Japanese tobacco market has reached 26.5%), it corresponds to 4.6 million incremental consumers (27.4 million consumers as of 23Q3, corresponding increase of 15% +).

As a result, we are optimistic that the volume and price of the company's e-cigarette business has risen sharply in 24 years, driving the company's revenue to exceed its growth. Our forecast for this revenue in '24 is about $1.41 billion (we forecast about $560 million in '23).

2. Increased profit margin: After personnel optimization+scale release, fees declined, and performance elasticity highlighted market expectations: the market was conservative about the growth in the company's revenue volume in 24, so it is believed that it is difficult to increase net interest rates.

We forecast:

1) Cost reduction and cost control and personnel optimization: The company has continued to promote open source and savings since '22. The total number of employees in '22 was 4985 (5,776 in '21). Apart from the fact that technical personnel are still growing, the number of people in administration, sales, and production has declined markedly. According to the mid-year report on 23, the company continues to reduce costs and control fees. It is expected that the management/sales expense ratio will continue to decline in 24 years with the release of revenue scale and the management/sales expense ratio.

2) R&D expenses tend to be relatively stable, and there is a lot of room for reduction in the cost rate: In '22, the company invested 373 million yuan in R&D, the R&D cost rate was 8.58% (+3.2pct), 38 million in '21, a 4% decrease over the previous year. It can be seen that the absolute value of R&D expenses tends to be relatively stable, and the R&D team formed by the company has basically formed, so we judge that there will be little additional expenses in the future. 23Q1-Q3 If revenue growth in 2014 exceeds expectations, there is a lot of room for decline in R&D expenses.

As a result, we believe that driven by revenue exceeding expectations and the company's active staff reduction, the total management+R&D expense ratio is expected to drop by about 3-4 pct in 24 years.