Huazhong CNC disclosed its annual report for the year 23. The company achieved operating income of 2.115 billion yuan in '23, an increase of 27.13% over the previous year; net profit to mother was 27.907 million yuan, an increase of 45.70% over the previous year. Among them, 23Q4's revenue was 819 million yuan, up 18.43% year on year; net profit to mother was 60.71 million yuan, down 16.25% year on year.

Numerical control systems have achieved significant growth, and gross margin has increased. The company's revenue from CNC systems and machine tools in '23 was 892 million yuan, up 26.22% year on year; gross profit margin was 38.65%, up 2.76 pct year on year.

Smart production lines have grown dramatically, and profit margins are expected to recover. The company's revenue for intelligent production lines and robots in '23 was 1,118 billion yuan, up 35.53% year on year; gross profit margin was 35.53%, down 2.05 pct year on year.

Among them, smart production line revenue was 817 million yuan, up 66.26% year on year; gross profit margin was 29.43%, down 2.17 pct year on year; new orders were added in '23. According to the company's 23 annual report, Huashu Jinming received more than 500 million yuan in export orders. We believe that with the increase in overseas revenue ratio, gross margin is expected to recover in the future. The robot's revenue for 23 years was 301 million yuan, down 10% year on year, gross profit margin 19.96%, down 5 pct year on year, and added 290 million yuan in orders.

Short-term R&D expenses are under high pressure, and the future is expected to be amortized on a large scale. The company's total expenses for the 23-year period were 705 million yuan, an increase of 112 million yuan; the cost ratio for the period was 33.34%, a year-on-year decrease of 2.31 pcts. Of this, R&D expenses for 23 years were 308 million yuan, an increase of 27% over the previous year, accounting for 14.6% of revenue.

Profit forecast and investment advice: We expect the company's net profit to be 1.03/171/263 million yuan in 2024-2026, respectively. Considering the company's leading position in the field of high-end CNC systems and its collaborative layout in the field of industrial robots and intelligent production lines, there is plenty of room for growth in performance under domestic substitution potential. We gave the company a 24-year PE valuation of 70 times the net profit to mother, corresponding to a reasonable value of 36.43 yuan/share, and maintained a “buy” rating.

Risk warning: risk of macroeconomic fluctuations and industry fluctuations; risk of industry and market competition; risk of product and technology R&D; risk of fund-raising projects falling short of expectations.