Focusing on resources and strengthening the main business, the company's profitability has increased dramatically: the company's current operating income in '23 was 2.48 billion yuan, up 22.3% year on year; net profit attributable to shareholders of listed companies was 121 million yuan, up 291.4% year on year, and net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 121 million yuan, an increase of 166.3% year on year. The performance is in line with expectations. The company's overall gross margin for 23 was 10.44%, up 1.33 pct year on year. Among them, the main LED chip and epitaxial film business had a gross profit margin of 18.21% in 23, an increase of 4.92 pct year on year. The main reason was the increase in gross margin due to lower unit costs. The cost rate for the 23-year sales period was 6.08%, a year-on-year decrease of 3.79pct. The company unswervingly implemented the “focus on resources and strengthen the main business” development strategy. The core business developed rapidly, and there were signs of a recovery in market terminal demand. The company's production capacity released superimposed product positioning and accurate grasp of market demand. High-end products represented by backlighting, high light efficiency, silver mirror reversals and other products were booming. Capacity utilization and production and sales rates remained consistently high, and sales scale reached record highs. The company continued to grow steadily. The company adhered to a refined management model covering the entire business process, especially strengthening independent technological innovation and R&D cost control. Investment remains stable, Economies of scale are prominent. Manufacturing costs have declined markedly, financial expenses have been drastically reduced, and profitability has increased.

The LED industry is picking up and demand is rising: In 23, the lighting industry as a whole was under pressure. Demand for home decoration, commercial activities, cultural tourism, large-scale commercial performances and sporting events recovered, and LED products were cleared faster. Driven by the gradual recovery of demand, the three major fields of lighting, backlighting, and display are expected to open up a broad market space, and the LED market has slowly returned to a growth trajectory. The company seized the recovery opportunity, and with large-scale investment and construction of the Suqian production base, the effect of releasing production capacity was obvious. Global awareness of energy saving and emission reduction is gradually increasing, urban infrastructure construction continues to advance, the share of the outdoor lighting market is increasing year by year, demand in the educational lighting market is increasing, and high-quality lighting and intelligent lighting permeate emerging fields such as “new infrastructure” and smart cities.

Fine management has achieved remarkable results, continuously optimizes the product structure, and expands the high-end market: the company continues to carry out informatization, systematization and fine management, continuously improve product quality, and effectively reduce production costs. The annual production of LED chips in 2023 was 21.74 million, up 14.78% from 18.94 million in 2021. The focus is on high-end LED chips represented by mini LEDs, automotive lighting, high-quality lighting, plant lighting, mobile phone backlighting, screen displays, etc. In the future, as newly purchased MOCVD equipment and chip process equipment are put in place, new products will be further expanded. The company plans to build an R&D and manufacturing expansion project with an annual output of 7.2 million Mini/Micro LED chips, which will further implement the company's layout on the Mini LED segment circuit and further enhance the company's profitability.

Investment advice: We expect the company's 2024-2026 EPS to be 0.23/0.26/0.26, and the corresponding 2024-2026 PE will be 42.6X/37.2X/37.4X, respectively. The company's high-end product production capacity continues to be released, the product structure is continuously optimized, and the results of refined management are remarkable. Combined with the recovery in downstream LED demand, it has improved the company's profitability and maintained a “recommended” rating.

Risk warning: Risk of LED downstream demand falling short of expectations; risk of product structure optimization falling short of expectations.