Incidents:

The company released its 2023 performance forecast, and achieved net profit of 50 million to 75 million yuan in 23, a year-on-year decrease of 51.35%-67.57%; net profit after deduction of 50 million to 75 million yuan, a year-on-year decrease of 49.58% to 66.39%.

The company announced on February 1 that the wholly-owned subsidiary Taixin Hong Kong, as the offender of the tender offer, intends to make voluntary conditional cash purchase offers to all shareholders of Vialey's issued shares other than Taixin Hong Kong if the prerequisites of the offer are met, and at the same time make a cash offer of share options to Vialey share option holders and cancel them.

The share offer price is HK$3.3 per share (or equivalent in Singapore dollars). The subject matter of this transaction is all of Weiyali's issued shares except those held by Taixin Hong Kong. As of the disclosure date of this announcement, the number of shares in this portion was 69.077 million shares.

Comment:

Revenue increased in 23 years but net profit margins were under pressure: In 2023, benefiting from the recovery of the automobile market and the constant development trend of vehicle electrification, intelligence, and integration, the demand for supporting electronic hardware increased. The company's sales improved quarter by quarter, achieving a quarter-on-quarter increase. In 2023, the company's distribution business is expected to achieve revenue of 2.13 billion yuan - 2.23 billion yuan, +8.25% -13.33% year over year; the company's self-developed IC business is expected to achieve revenue of 280 million yuan - 300 million yuan, +26.46% -35.49% year-on-year. However, due to the decline in the company's gross margin, depreciation of assets, and operating losses of participating companies, the company's net profit attributable to shareholders of the parent company declined year-on-year. The specific situation is: due to exchange rate fluctuations, the gross margin of the company's electronic components distribution business decreased by 3-3.5 percentage points compared to the same period of the previous year; the company's inventory and accounts receivable impairment preparation in '23 was estimated to be 35 million yuan to 40 million yuan, and the impairment amount was 8.9402 million yuan in 2022; the company's new participating company, Weiali, anticipated operating losses. The company confirmed its investment losses based on the shareholding ratio. The estimated amount of loss accrued to the loss was 16 million yuan to 24 million yuan (in Vialey 2023) Preliminary estimated results based on the September 30 interim report).

It is proposed to acquire Weiyali wholly-owned through its subsidiary Taixin Hong Kong to improve the distribution business layout: the company's wholly-owned subsidiary Hong Kong Taixin plans to make voluntary conditional cash purchase offers to all shareholders of Vialey's issued shares other than Taixin Hong Kong, and at the same time make cash offers of share options to Vialey share option holders and cancel them. Prior to this tender offer, Taixin Hong Kong held approximately 21.24% of Vialier's shares.

Weiyali's revenue for FY22, FY23, and the first half of FY24 was $2.78 billion, $2,746 billion, and $1,249 million, respectively; net profit was $67 million, $0.2 billion, and -87 billion yuan, respectively. Weiyali is mainly engaged in electronic component distribution business, mainly distributing products from internationally renowned electronic component design manufacturers such as ST (ST), Asahi Kasei Microelectronics, Murata, and Sanken Electric. The main customers include Haier Group, Zhongshan Taiyo, Atech, Dongfang Jiule, Zongmu Technology, etc. The company and Vialey have strong complementarity and business collaboration in product lines, product categories, application fields, etc. In terms of product lines, the company mainly represents the Japanese and Korean product lines, and Vialey mainly represents European, American and Japanese product lines; in terms of product categories, the company mainly focuses on passive components, while Vialey mainly focuses on the field of automotive electronics. In terms of downstream application fields, the company mainly focuses on the field of automotive electronics. The downstream sector of Weiya involves various fields such as automobiles, industry, home appliances, video, and communications. Among them, products used in the automotive electronics sector account for the largest share of revenue, reaching about 30%. Over decades of operation, Weiyali has accumulated rich customer resources. The main customers in the automotive electronics field are automotive electronic parts manufacturers, and its products are widely used in well-known brand automakers such as BYD, Chery, SAIC, GAC, Changan, and Xiaopeng. Therefore, through this restructuring, it is possible to promote the company to improve the product line layout, enrich distribution categories, and expand the downstream customer base, thereby promoting the further development of the company's electronic components distribution business. In line with the company's previous acquisitions of Yihai Energy and WE, we believe that the company's distribution business will continue to strengthen its product categories, channel resources, and customer resources through a series of strategic mergers and acquisitions, and we are optimistic that the company's future distribution business will gradually have scale effects and competitive advantages.

Profit forecast, valuation and rating: Considering the company's 23-year performance forecast and the auto market sentiment falling short of expectations, we lowered the company's 23/24/25 net profit forecast to 67 million (-29%, same below)/164 million (-15%)/246 million yuan (-6%). The current market value corresponding PE is 33x/13x/9x.

Although demand in the automotive market fell short of expectations in '23, we believe that the company's analog IC design has long-term growth momentum against the backdrop of a rapid increase in the localization rate, maintaining a “buy” rating.

Risk warning: The risk that demand in the automobile market falls short of expectations; competition for proposed chips in vehicle scale increases risk.