In fiscal year 2023, Yingheng Technology (01760.HK) achieved total revenue of RMB 5.08 billion, an increase of 20.1% year-on-year, and gross margin fell 2.9 percent points year-on-year to 18.7%, which was lower than our expectations. Gross margin far below average and continued rise in R&D expenditure led to the Group's net profit being lower than about 23.0% in the same period last year.
Revenue growth and relaxation: According to the business segment, Yingheng Technology (01760.HK) recorded a year-on-year ratio of 34.9% (2022:34.9%)/7.7% (50.0%)/32.8% (33.5%)/3.3% (39.9%)/58.8% (151.3%)/-52.0% (-23.5%) in the new energy/body system/safety system/power system/smart driver/cloud service business segment. The New Energy Business Division is still the Group's main revenue component, and the Smart Driving Network is the Group's main growth engine. However, due to intense competition, automobile manufacturers tend to adopt lower cost or lower configuration solutions, leading to ADAS penetration rate and group growth and relaxation.
Forced to change pricing strategy: Yingheng Technology (01760.HK)'s gross margin for the second half of fiscal year 2023 was only 17.1%, which meant that the Group changed its consistent cost pricing strategy of + ~ 20%, and the pricing strategy did not change significantly during the subsequent period of market fluctuations. Changing the pricing strategy to spend time with upstream and downstream partners meant that the downstream price war brought tremendous pressure to the group, and we did not see any improvement in the first quarter of 2024.
The Yiran Group launched more complex solutions such as power bricks, which are expected to stabilize the profit rate in the second half of the year. However, the overall profit rate is still affected by automobile manufacturers adopting lower cost or lower configuration solutions and remains at a lower level.
Rapidly increasing financing costs: Due to i) the recovery of inventory levels from the core shortage period and ii) investment in fixed asset deposits at the Nantong base, the working capital of Yingheng Technology (01760.HK) became more tight. Its loan level rose to RMB 1.65 billion, and the net debt-to-equity ratio also increased to 48.1%. Given that the Group's investment in the Nantong base has basically been completed, and the cash circulation cycle has improved after recovery, we expect that the Group's leverage ratio will increase and the negative impact of financing burdens will also decrease.
The operating situation is unsatisfactory: We cut the profit forecast of Yingheng Technology (01760.HK) by about 51% to 58% to reflect the serious challenges faced by the group. The overall profit ratio is likely to continue to be overwhelmed by low gross profit margins, higher-than-average R&D development and financing costs. However, in the intense downstream price war, we were unable to see a turnaround signal for a while, so we cut the group target price to HK$2.85 per share to maintain our purchase rating.