Incident: The company released its 2023 annual report. Revenue for 2023 was 1,128 billion yuan, down 13.9% year on year, and net profit to mother was 187 million yuan, down 4.53% year on year.

Key points of investment

The business pattern has been adjusted, and the leading smart mechatronics business is ready to go: the company achieved operating income of 1,128 billion yuan in 2023, -13.9% year over year, operating cost 701 million yuan, -17.36% year over year, and net profit to mother of 187 million yuan, -4.53% year over year. The main reason is the transformation of the digital set-top box business for smart mechatronics and the sale of “Jiasheng Power” in the new energy business. In terms of main business, the company's gross margin of smart mechatronic products stabilized at 44.45% in 2023, while the value of inventory products reached 673 million yuan, +168.5%. The sharp increase in inventory was due to the expansion of the company's military product sub-business, and the 660 million yuan technical support equipment vehicle production task signed with the military was carried out as scheduled. In the future, revenue will be confirmed based on actual delivery conditions. It is expected that the company's convertible revenue and profit will increase in the future.

The loss-making charging pile project was divested, and the business integrated to achieve the conversion of old and new kinetic energy: 1) In April 2023, the company issued an announcement to sell 100% of the shares of the wholly-owned subsidiary “Jiasheng Power”, whose performance continued to decline, to “Jiasheng Electronic Control” at a transfer price of 140 million yuan; at the same time, “Jiasheng Electronic Control” increased its capital by 56 million yuan, holding a total of 16% of its shares after the capital increase was completed. Under the premise of divesting its loss-making business, the company horizontally integrates industry resources and strengthens its layout in the field of motor electronic control. 2) In 2023, the company invested in the establishment of new subsidiaries “Times Power”, “Suzhou Kuopte” and “Anhui Xiaojun” to carry out long-term system research and development in the fields of new energy, intelligent mechatronics, etc., which is in line with the company's overall interests. 3) In August 2023, the company issued a board plan announcement. It plans to invest 30 million yuan to participate in the “Gus Aerospace” capital increase and share expansion project, with a shareholding ratio of 0.92%. The company actively seeks ground equipment business cooperation in the satellite communications industry, which is conducive to promoting the company's sustainable development and providing long-term economic benefits.

Hard targets for the 14th Five-Year Plan promote the modernization of national defense equipment, and future demand for military products is strong and stable: According to the forward-looking instructions of the country's 14th Five-Year Plan, the development of intelligent weapons and equipment is the general trend on the path to modernizing the national defense force. The company's standardized military products in the field of intelligent special equipment have entered the military equipment support system, and the downstream customer base is stable. Against the backdrop of continued increase in defense investment and accelerated upgrading of weapons and equipment, the company's current production capacity is abundant and future orders are stable, and overall performance is expected to benefit from this.

Profit forecast and investment rating: The company's performance is in line with expectations. China is in a stage of accelerated development of national defense informatization, and demand for smart mechatronics is expected to be strong. Furthermore, Galaxy Electronics has been deeply involved in the field of smart mechatronics for many years. Based on the company's leading position in the industry, it is expected to benefit from downstream expansion. We forecast that the company's net profit for 2024-2026 will be 2.56 (-0.10) /3.01 (+0.03)/345 million yuan, respectively. The corresponding PE is 22/19/16 times, respectively, maintaining the “buy” rating.

Risk warning: 1) Special equipment price review risk; 2) raw material price fluctuation and insufficient supply risk; 3) Market competition increases risk.