2023 results are in line with our expectations

The company announced 2023 results: 1) In 2023, the company achieved operating income of 4.697 billion yuan, +0.86% year on year, net profit to mother of 376 million yuan, +10.31% year-on-year, after deducting net profit of 297 million yuan, or -2.79% year-on-year. 2) Corresponding to 4Q23, operating income was 1,054 million yuan, -1.51% year-on-year, net profit to mother was 98 million yuan, -18.76% year-on-year, net profit after deduction of 52 million yuan, -13.70% year-on-year. The company's performance was in line with our expectations.

The overseas inventory of general lighting has almost ended. 1) Affected by inventory removal in overseas markets, domestic lighting exports were US$43.8 billion in 2023, -5.6% year-on-year. The company's performance was better than the industry, but there was still a slight decline. The annual general lighting business revenue was 3.86 billion yuan, -2.6% year over year. On a quarterly basis, we estimate that 3Q23/4Q23 may improve somewhat month-on-month. We believe that the overseas inventory removal of the lighting category is almost over, but it remains to be seen how downstream customers will replenish their inventory. 2) Benefiting from internal cost reduction and efficiency, the gross profit margin of the general lighting business was 19.2% (+2.6ppt) in 2023, and profits continued to improve.

The automotive business continues to grow rapidly. 1) In 2023, the company continued to make efforts in automotive business product research and development, production line expansion and upgrading, and order development. The annual vehicle business revenue was 624 million yuan, +44% over the same period last year. 2) In 2023, new projects such as Marelli LDM/taillight emitting board/headlight ECU, and universal BMS were added to form good cooperation with leading auto parts Tier 1 manufacturers. 3) The gross profit margin of the automotive business in 2023 was 19.3% (+1.6ppt), mainly due to the increase in the share of the high-profit automotive electronics business.

Financial analysis: 1) In 2023, the company continued to promote supply chain optimization and automated production to enhance product cost competitiveness while improving profitability. The company's annual gross margin was +2.6ppt to 19.4% year-on-year. 2) Sales Expense Rate/Management Expense Rate/R&D Expense Ratio +0.3/+0.5/+0.3ppt, respectively. Taken together, the net interest rate to mother was +0.7ppt to 8% year-on-year, reaching the highest level in recent years.

3) The net cash flow from the company's operating activities in 2023 was 784 million yuan, and the quality of operations is still relatively stable.

Development trends

As the overseas inventory of the lighting category comes to an end, we expect the company's general lighting business to gradually pick up in 2024, but we still have to watch the pace of overseas customers placing orders. As the company's second growth curve, the automotive business is progressing steadily, and new fixed points are gradually being implemented. We believe it is expected that it will continue to contribute to the increase.

Profit forecasting and valuation

Considering that the progress of inventory replenishment in overseas markets is still uncertain, we lowered our 2024 profit forecast by 5% to 416 million yuan and introduced a profit forecast of 469 million yuan for 2025. The current stock price corresponds to 2024/2025 12.6x/11.1x P/E. Maintaining an outperforming industry rating, we lowered our target price by 14% to 15 yuan, corresponding to 2024/2025 17.2x/15.3x P/E, based on the decline in profit and industry valuation, with 37.1% upside compared to the current stock price.

risks

Raw material price fluctuation risk; exchange rate fluctuation risk; vehicle business development falls short of expectations.