Incident: On January 29, the company released its 2023 performance forecast. In 2023, it is expected to achieve net profit of 60 to 70 million yuan, a year-on-year decrease of 69.13%-73.54%; after deducting non-net profit of 7 million yuan to 3 million yuan, a year-on-year decrease of 98.26%-104.05%.

Poor demand compounded impairment of goodwill, putting pressure on the company's performance. The decline in the company's performance in 2023 is mainly due to a decline in market demand and goodwill impairment preparations: in terms of communication terminal equipment manufacturing, the company's order volume declined markedly due to sluggish demand from the industry, compounding customer demand for inventory removal and cost reduction, and the decline in order prices and gross margin; the sensor sealing business is still in a high investment period, with high upfront profit pressure; in addition, the company expects to reduce the goodwill impairment amount of about 200 million yuan for the acquisition of shares in Shandong Wenyuan.

On the cost side, with operations facing many challenges in 2023, the company continued to accelerate digitalization and intelligent upgrading, and actively promoted cost reduction and efficiency. The gross margin in a single quarter in Q4 exceeded 16%, a record high in various reporting periods during the year.

Digital communication services have developed steadily, and 800G switches have achieved breakthroughs. In terms of Netcom business, the company broke through the overseas customer series 10GPON JDM project, mass production of WiFi 70,000 gigabit routers, and basically achieved full customer coverage; in the digital communication business, it broke through the customer's 800G high-end switch project, won EMS orders from overseas customers in key regions, and achieved mass production of enterprise network core routers. We believe that with the rapid advancement of industrial digitalization and intelligence, communication network equipment is expected to continue to evolve to a high rate of upgrading, and the company is expected to accumulate and benefit from the industry.

The mobile communications business is growing rapidly, and new FWA products are expected to gradually expand. In terms of base station communication, the company actively laid out a localization plan. The 5G elevator integrated leather station equipment was unveiled at the China Mobile Global Partner Conference. The annual sales volume of the base station communication business exceeded 180 million yuan, an increase of more than 80% over the previous year, and Q4 revenue exceeded 80 million yuan in a single quarter; in the FWA business, the products completed a smooth transition from WiFi6 to WiFi7, and were steadily shipped in batches to major overseas operators, which is expected to contribute new growth.

Continue to lay out new tracks, and growth can be expected. 1) Sensor packaging and testing: Through multiple customer certifications, the packaging production line went online, and the company's first pressure sensor packaging product went offline, with sales exceeding 40 million yuan in 2023, an increase of more than 240%; 2) Automotive electronics business: the customer matrix continued to expand, with revenue exceeding 90 million yuan in the 2023 Q4 single quarter, and annual sales exceeding 160 million yuan, an increase of more than 1,100% over the previous year, and the lidar motherboard product mass production project was successfully introduced.

Profit forecast and investment rating: The company's net profit for 2023-2025 is estimated to be 0.65/3.52/495 million yuan, respectively. The current stock price corresponds to PE of 84/16/11 times, respectively, maintaining a “buy” rating.

Risk warning: Customer growth falls short of expectations, downstream demand falls short of expectations, risk of fluctuations in raw material prices, risk of macroeconomic fluctuations.