The company's revenue grew steadily, and continued to benefit from the 2023 revenue of domestic replacement companies for high-end CNC systems of 2.115 billion yuan, +27.1% year on year; net profit to mother was 0.27 billion yuan, +45.7% year on year.

The company is a leader in domestic CNC systems. It has maintained steady growth in the context of the overall decline in the machine tool industry. It is deeply integrated with downstream enterprises, and its five-axis processing technology has reached the international advanced level; supporting businesses for industrial robots and new energy vehicles are actively exploring overseas markets; and it is expected that it will continue to benefit from domestic replacement of high-end CNC systems and lithium batteries going overseas. However, considering the company's large investment in CNC system research and development, we slightly lowered our profit forecast for 2025-2025 and added a profit forecast for 2026. We expect the 2024-2026 net profit of 1.16/1.58/2.91 (the value before 2024-2025). The current stock price corresponds to PE52.4/38.3/20.9 times PE. Maintain a “buy” rating.

Gross margin declined slightly, and cash flow continued to recover

In 2023, the company's gross sales margin was 32.9%, year-on-year -1.14pct, net profit margin 1.1%, and +0.74 pct year-on-year. Among them, the gross profit margin of the company's CNC systems and machine tools was 38.65%, an increase of 2.76 pct over the previous year. We believe this is due to the increase in the sales share of the company's high-end CNC systems. The company's cash flow continued to improve. Net operating cash flow was 0.02/0.60/0.51/212 million yuan as of the end of each quarter in 2023, respectively, which is back positive compared to 2022. The company continues to increase investment in R&D, with R&D expenses of 310 million yuan in 2023, an increase of 26.5% over the previous year.

A strategic cooperation agreement was signed with Guozhi Center, and the National Intelligent Design and CNC Technology Innovation Center signed a strategic cooperation agreement with the National Intelligent Design and CNC Technology Innovation Center to jointly develop technology and cooperate on high-performance CNC technology and high-end CNC systems, industrial Internet platforms, intelligent servo and dynamic modeling, intelligent motor technology, robots, and intelligent production lines. The Guozhi Center is a science and technology innovation entity commissioned by the Ministry of Science and Technology of the Hubei Provincial People's Government. It is expected to further enhance the company's scientific research capabilities and increase the construction of platforms such as CNC systems, industrial Internet, and intelligent production lines. In 2023, the company announced that it plans to raise no more than 100 million yuan in capital. After the completion of the fund-raising project, it will increase the production capacity of 1,200 sets of 5-axis machining center CNC systems, 500 5-axis lathe CNC systems, 300 sets of 5-axis laser CNC systems, and 2,500 sets of special 5-axis CNC systems to comprehensively increase the production capacity of high-end CNC systems and continue to benefit from domestic replacement.

Risk warning: The company's high-end CNC system R&D iteration progress falls short of expectations, downstream domestic production substitution progress falls short of expectations, and macroeconomic recovery falls short of expectations.