Net profit to mother fell 66.15% in '23. Maintaining the “buy” rating, Hongyuan Electronics published an annual report. In 2023, it achieved revenue of 1,666 million yuan (yoy -33.02%), net profit to mother of 272 million yuan (yoy -66.15%), deducting non-net profit of 266 million yuan (yoy -66.12%). Among them, Q4 achieved revenue of 346 million yuan (yoy -38.07%, qoq -0.85%) and net profit of 25.9305 million yuan (yoy -80.92%, qoq +10.28%). Due to strong demand from downstream customers for low-cost procurement, the company's gross margin has declined significantly, and investment in new business is high. We expect the company's EPS for 2024-2026 to be 1.65, 2.21, and 2.81 yuan respectively (previous value 2.88 and 4.24 yuan in 2024-2025). Comparatively, the company Wind agreed to expect an average PE value of 26 times in 24, giving the company 26 times PE in 24 years, with a target price of 42.90 yuan (previous value of 69.12 yuan), maintaining a “buy” rating.
Downstream demand in the self-production business is weak, and product gross margin has declined markedly
In '23, the company's self-produced electronic components achieved revenue of 920 million yuan, a year-on-year decline of 33.03%. The main reason is that MLCC, the core product, was affected by the external environment, and downstream demand was weak, and sales fell short of expectations. At the same time, customer demand for low-cost procurement was strong, causing sales prices to decline. Self-produced MLCC only achieved sales revenue of 801 million yuan throughout the year, a decrease of 38.10% over the same period last year. The agency business achieved revenue of 741 million yuan, a decrease of 32.85%. The main reason was that some core industrial customers and consumer customers were affected by external markets, and business recovery fell short of expectations. In terms of gross margin, the gross profit margin of the self-production business was 63.71%, a decrease of 17.20 pct, mainly due to product price cuts and an increase in the share of new products with low gross margin; the gross profit margin of the agency business was 10.61%, down 0.17pct, with little fluctuation.
Expense rates have increased significantly, and depreciation has further reduced profits
The cost rate for the 23-year corporate period was 19.24%, up 7.96pct from '22. Among them, the sales cost ratio was 5.70%, increasing 2.66 pct, and the main departments expanded their business development efforts; the management expense ratio was 6.95%, increasing 2.86 pct, mainly due to the increase in business types and management costs; the R&D cost rate was 6.39%, increasing 2.45 pct, mainly due to the company's continuous increase in R&D investment. These are new businesses such as microprocessors, microcontrollers and supporting integrated circuits, microwave modules, and micro-nano systems, which require continuous increase in R&D investment. Furthermore, in 23 years, the company prepared 46 million yuan for impairment of various assets, which led to a further decline in net profit.
The development of new products is progressing smoothly, and the second growth curve is gradually becoming clear
In 23 years, the company continued to develop new products. Filter products, microcontrollers and supporting integrated circuit products achieved revenue of 24.62 million yuan and 54.75 million yuan respectively, with year-on-year increases of 14.21% and 156.42%, respectively. Other electronic component products such as microwave modules achieved sales revenue of 39.55 million yuan, an increase of 7.77% over the same period last year. Furthermore, the company has developed more than 30 micro-nano system integrated ceramic tube shell products in 23 years, and is already in the small-batch supply stage. The development of the non-MLCC business continues to improve, and the second growth curve is gradually becoming clear.
Risk warning: Self-produced business orders fall short of expectations, and there is a risk that product gross margin will fluctuate.