Reiterating Ruisheng Technology's “buy” rating, the target price was raised to HK$28.8, a potential increase of 19%.
Reiterating Ruisheng's “buy” rating: Ruisheng 2H23's performance was generally in line with expectations, and both revenue and profit achieved good month-on-month growth. We believe this is mainly due to the recovery and growth of demand from the smartphone industry and major customers, as well as the company's own promotion of product upgrades and operational efficiency improvements. We expect this trend to continue in 2024. The company's original business revenue is expected to grow by 10%-15%, and gross margin to return to 20% or more. Looking further, the PSS business is expected to contribute to determining incremental and long-term growth. Taken together, we expect Ruisheng's revenue to grow 25% this year, and the Group's comprehensive gross margin will reach more than 20%. Combined with current price-earnings ratios of 21.1x and 17.8x for 2024 and 2025, we reaffirm the company's “buy” rating.
PSS also provides long-term fundamental increases: PSS, the automotive acoustics standard acquired by Ruisheng, was confirmed and listed in mid-February. Based on the results of the past three fiscal years, PSS is expected to provide a consolidated revenue increase of approximately 15% and a gross profit margin of more than 20% in 2024. With the rapid growth of the global and Chinese NEV industry, PSS can not only benefit from its leading market share of European and American car companies, but is also expected to enjoy the growth dividends of Chinese NEV companies. We are relatively optimistic about the Group's growth brought about by the long-term growth of the target company.
Competition in the optical industry is easing, and the company's business is expected to reverse losses: in the second half of 2023, Ruisheng Optics recorded a gross margin of -9.1%, and the loss margin improved year-on-month. The company's gross profit margin was corrected in December of last year and the first quarter of this year, and is expected to be corrected at the full year level this year. We believe this is mainly due to the easing of competition in the smartphone optics industry, and leading manufacturers have entered a stage of profit recovery. We expect the company's camera business to achieve break-even in the second half of this year, and the gross margin of the module business is also expected to improve this year. This is in line with the overall trend of the industry.
Valuation: We use the segmented and aggregate valuation method to value Ruisheng. We gave Ruisheng a price-earnings ratio of 22.0x, 20.0x, 18.0x, 20.0x, and 15.0x for acoustic products, electromagnetic transmission and precision structural parts, optical products, and MEMS devices in 2024, respectively, and obtained a target price of HK$28.8, with a potential increase of 19%. We reaffirm Ruisheng Technology's “buy” rating.
Investment risk: Demand for terminals such as smartphones and new energy vehicles is growing less than expected. The upgrading of industries such as acoustics and optics has slowed down, and competition has intensified. The growth of major customers is slowing down, hampering performance.
Increased investment in new businesses affects the level of profitability.