Incident Overview: The company announced its 2023 annual report, achieving operating income of 610 million yuan, +95.39%: net profit to mother of 80.54 million yuan, turning a year-on-year loss into a profit; in a single quarter, 2304 achieved operating income of 205 million yuan, +6.12% year over year; net profit to mother of 4.9981 million yuan, with a net loss of 23.374 million yuan for the same period last year, turning a loss into a profit. We believe that the main reason for the sharp year-on-year increase in revenue is due to significant market expansion results, such as the increase in the company's order volume in new markets such as Shenzhen, Chongqing, Qingdao, Dalian, Kaifeng, Jinjiang, and Shangrao. Net cash flow from operating activities was realized in 2023 of $107 million, or -30.94% year-on-year.

Revenue from the main business increased rapidly, and gross margin was under pressure. Looking at the breakdown, landscape lighting engineering/landscape lighting other services/landscape lighting design/other businesses achieved revenue of 569 million yuan/276.541 million yuan/9.914 million yuan/3.3211 million yuan, compared to +105.12%/+96.97%/+86.96%/+86.96%, gross margins of 28.80%/32.91%/80.10%/29.15%, respectively. The company's gross margin in 2023 was 29.82%, compared to -4.48pct year on year; compared to 12.65%, compared with a net margin of 12.65%, compared to 12.65% In the same period last year, +18.24pct, the company's operating capacity continued to improve. 202304's gross margin was 27.47%, -5.83 pct year on year, -6.44 pct month on month; net margin was 1.90%, +14.79 pct compared to the same period last year and -17.31 pct month-on-month, under short-term pressure in the fourth quarter. In 2023, the company's R&D investment amount was 25.7027 million yuan, -2.82% year-on-year: R&D investment accounted for 4.21% of revenue, compared with -4.26pc in the same period last year.

It is proposed to acquire dominant players from overseas and transform to build the core competitiveness of digital entertainment. According to the “Notice on Progress in Planning Major Asset Restructurings” on December 27, 2023, the company plans to acquire 85% of Predaptive OD Limited's shares (including 70% of the shares held by its shareholders Equal Creation Ltd, Andrew Brown, and Joe Jurado; 15% of Stuart Hetherington's shares); to acquire the target Predaptive OD Limited Its subsidiary is Holovis International Ltd. The purpose of the acquisition is to continue to consolidate the company's core competitiveness in the fields of digital cultural tourism, AR/VR, etc., and enhance R&D advantages in the fields of immersive experience, motion capture, virtual simulation, and interactive technology. In 2023, the company completed a number of 4D cinema upgrade projects and launched innovative projects such as WS Dream Land in Wuhan Wushang Dream Times Square and the “Mountain and Sea Scenic” cultural tourism metaverse app on Zhongshan Road in Qingdao; it also cooperated to create the “LEGO Factory Adventure Tour” project at LEGOLAND Resort in Shenzhen. We believe that if this acquisition is successfully completed, 1) Holovis can join forces with the company's domestic cultural tourism business to help improve the downstream customer experience and increase value: 2) Holovis can help the company expand overseas markets and develop a larger cultural tourism market with the support of innovation and technology. We judge that the company's profit scale and capacity will increase significantly.

Innovate and promote the “Energy +” model, and the “0-1” business is progressing smoothly. The company innovated and promoted the “energy +” model to provide customized energy solutions for special scenarios such as municipal administration, hospitals, schools, and industrial parks. The company entered the field of new energy in 2020 and established Shanghai Quanze New Energy Technology Co., Ltd. in July of that year. In December 2022, the company announced that it plans to cooperate with Dalian State-owned Capital Management and Operation Co., Ltd. to jointly invest 450 million yuan to establish Dalian Guoheng New Energy Co., Ltd., with Roman shares holding 35% of the shares. The distributed photovoltaic project on the roof of the Dalian Municipal Committee and Municipal Government office building achieved grid-connected power generation, making it the first government office building using green energy in Northeast China. At the same time, through technological upgrades and energy-saving transformation, the company improves the efficiency of street lighting systems and helps the sustainable use of urban energy. The Romanhui Cloud Management Platform continues to develop digital functions, including real-time energy data for photovoltaic power generation, energy saving and carbon index analysis, etc., to promote the high-quality development of distributed digital energy. We believe that the sector will achieve a 0-1 breakthrough in the landscape lighting business model, and it is expected that it will make a significant incremental contribution starting in 2024.

Investment advice

Considering that there is still great macroeconomic uncertainty, we lowered our 2024-2025 revenue forecast of 988/1,339 million yuan (original 12.14/1,512 million yuan), net profit forecast to mother of 138/171 million yuan (original 177/208 million yuan), and added 2026 revenue and net profit forecasts, respectively, of 1,753/209 million yuan and EPS 1.26/1.55/1.90 yuan, corresponding to the closing price of 35.6 yuan on March 26, 29.77/ 24.05/ 19.68x PE, maintaining a “buy” rating.

Risk warning

Demand falls short of expectations, construction costs are higher than expected, new business expansion falls short of expectations, proposed acquisitions fall short of expectations, systemic risk.