Core views

In 2023, the company achieved revenue, net profit attributable to mother, and net profit of 46.97 billion yuan, 3.76, and 297 million yuan after deduction, with year-on-year increases of 0.86%, 10.31%, and -2.79%, respectively. While steadily contributing profits to the main general lighting business, the company has seized opportunities for smart vehicle transformation. It has now achieved LDM and BMS support for top international car companies, and strengthened software and hardware capacity building and domain controller research and development. The future is expected to usher in both performance and valuation improvements. The company's net profit for 2024-2025 is estimated to be 430-490 million yuan, respectively. Corresponding to the current stock price PE, it is 12X and 11X, respectively, giving it a “buy” rating.

occurrences

On March 6, 2024, the company released its 2023 annual report. It achieved annual revenue of 4.697 billion yuan, up 0.86% year on year; net profit to mother of 376 million yuan, up 10.31% year on year; net profit after deducting 297 million yuan, down 2.79% year on year.

Brief review

Net profit attributable to mother for the year was +10.31% year-on-year, benefiting from the sharp rise in gross margins of the two major businesses. In 2023, the company achieved revenue, net profit attributable to mother, and net profit of 4.697 billion yuan after deduction, respectively, with year-on-year increases of 0.86%, 10.31%, and -2.79%, respectively. Revenue stabilized and rebounded slightly throughout the year, mainly due to the volume of the automotive business, hedging the impact of the decline in revenue in the general lighting sector. Specifically, the company's main lighting business stabilized in 2023. The sector's revenue and export sales were about 4,041 billion yuan and 3.752 billion yuan respectively, down 2.79% and 1.43% year-on-year respectively, and the decline was significantly narrower than the previous year (11.39% and 7.34%). According to data from the General Administration of Customs, China's exports of lamps and lighting devices and parts fell 4.6% year on year in 2023, indicating that the company's export performance was superior to the industry as a whole. The automotive business continued to break through, achieving revenue of 624 million yuan, a year-on-year increase of 43.74%, driving the company's overall revenue growth of more than 4 pcts. The company's net profit growth rate was nearly 10 pct higher than the revenue growth rate, mainly due to the increase in gross margin of the two major businesses. Among them, the gross profit margin of the general lighting business was 19.23%, up 2.55 pct year on year; the gross profit margin of the automotive business was 19.25%, up 1.63 pct year on year. There was a slight negative increase in the company's deducted non-net profit, which was mainly hampered by one-time asset impairment provisions (approximately $88 million). Q4 The company's revenue, net profit to mother, and net profit after deduction of non-net profit in a single quarter were 1,054 million yuan, 0.98, and 52 million yuan, respectively, down 1.51%, 18.76%, and 13.70% year-on-year, respectively, and down 11.23%, 13.58%, and 35.25%, respectively. The company's sales are mainly in overseas markets. Overseas and domestic sales reached 37.52 million yuan and 945 million yuan respectively in 2023, up -1.43% and 12.19% year-on-year respectively.

The main lighting industry showed the effect of reducing costs, and Q4 gross margin reached a record high for the same period. In 2023, the company's gross profit margin and net profit margin were 19.35% and 8.05% respectively, up 2.59 and 0.74 pct year-on-year respectively. As mentioned earlier, the increase in the company's overall gross profit margin and net margin mainly benefited from the increase in both the gross margin of the main lighting business and the automotive business. Among them, the reduction in costs related to the general lighting business was significantly higher than the decline in revenue. 2023Q4's gross profit margin, net profit margin, and period expense ratio were 23.63%, 9.30%, and 13.02%, respectively. The year-on-year ratio was +2.26, -1.98, and -0.88pct, respectively, and +5.11, -0.32, and +2.34pct, respectively. Among them, gross margin was the highest in the same period since 2016. The sales/management/R&D/finance expense ratios were 2.99%, 6.58%, 5.02%, and -1.57%, respectively, +0.39, +1.51, +0.40, and -3.18pct, year-on-year, and -0.57, +2.77, +1.58, and -1.45pct, respectively. Q4 Financial expense ratios declined due to exchange gains and losses. Net interest rates declined significantly year-on-year, mainly due to reduced profit and loss due to changes in fair value and impairment of accrued assets.

The market share of the main general lighting business is expected to increase, and production capacity is climbing to drive the volume of the automotive business. The company's business is mainly divided into two major segments: general lighting and automotive business. Among them, general lighting is the company's traditional main business, and the automotive business has been the focus of development in recent years. (1) At present, China is the world's largest producer and exporter of lighting and electrical products, and its share of the global market has increased to 60%. In the short term, due to negative effects such as insufficient demand in the general lighting industry and intense competition for homogenization, the company's traditional lighting business will inevitably be under pressure. In the medium term, international lighting giants have gradually divested their related businesses in recent years, while small and medium-sized enterprises are facing tremendous pressure such as supply chain stability, channel changes, and continued profit compression. Clearance is being accelerated. Market concentration is expected to increase, and the company is expected to benefit as an industry leader. (2) According to the automotive business development strategy, the company continues to expand and increase investment in the field of “vehicle lighting+vehicle controller”. The company has established good cooperative relationships with well-known component companies such as Panasonic, Huayu Vision, Wanxiang, Ma Ruili, Hella, and Sanli; successfully implemented the automotive ECU manufacturing unit expansion project and the automotive lighting structural component expansion and upgrade project. The fixed projects have been steadily and mass-produced and continuously received more than 1 billion yuan in additional fixed-point projects; the terminal brands involved include Porsche, Audi, Volkswagen, Nissan, Daihatsu, Toyota, Ideal, GAC, Zero Run, Changan and Geely. The company is also actively developing other intelligent segments to expand incremental business, such as investing in Kong Imaging Technology, and indirect access to CMS electronic rearview mirrors and electric rear wing tracks.

In 2023, the company continued to expand the automotive business production line, including mass production at the second vehicle ECU manufacturing workshop in Hengdian, the third workshop completed the installation of the production line, the construction of the new Liangxinpeng production base in Wuhan (Phase I) was completed and put into use, and production and sales were strong. In February 2024, Debon Automotive Lighting, a wholly-owned subsidiary of the company, received a letter of intent from Yanfeng Piou for the project to supply light-emitting grille PCB bracket assembly products. The project cycle is expected to be 5 years, and batch delivery will begin in 2024. The total amount is about 75 million yuan, which is expected to have a positive impact on the company's business performance. In the same month, the company officially established the Shanghai Debang Vehicle Technology Center as an “accelerator” for the continuous improvement of its R&D capabilities.

Investment advice

The company is a leading domestic general lighting company. The traditional main business contributes steadily to profits, and the new business “vehicle controller+vehicle lighting” ushered in rapid growth. Seizing the smart car transformation window, the company has now achieved LDM and BMS support for top international car companies, while strengthening software and hardware capacity building and domain controller research and development. It is expected that both performance and valuation will improve in the future. The company's net profit for 2024-2025 is estimated to be 430-490 million yuan respectively, corresponding to current PE stock prices of 12X and 11X respectively.

Risk analysis

Overseas market customer demand falls short of expectations; risk of price fluctuations in overseas markets; risk of fluctuating sea freight prices and uncertain delivery cycle; risk of increased foreign exchange losses and hedging effects; domestic automotive electronics market customer demand falling short of expectations; risk of controller business unit price and shipment volume fluctuations; risk of declining product profitability; risk of falling BMS, LDM and new product development progress; risk of controller customer development not meeting expectations; risk of domestic factory capacity building process falling short of expectations; domestic controller industry competition increasing risk; domestic automobile sales not meeting expectations Expected risk; risk that vehicle electrification progress falls short of expectations; risk of fluctuations and shortages in raw material prices.