Incidents:

On April 1, 2024, Wuxi Zhenhua announced a pre-increase in the results for the first quarter of 2024. It is estimated that net profit due to mother will be 66.05 million yuan to 76.06 million yuan in 2024Q1, up 74.94% to 99.94% year on year; net profit without return to mother is expected to be 63.50 million yuan to 73.0 million yuan in 2024Q1, an increase of 97.00% to 126.47%. The company's 2024Q1 performance increased significantly.

Investment highlights:

The company's performance increased significantly year over year, fully benefiting from order growth, cost improvement and new business expansion. The company expects net profit to be 66.55 million yuan to 76.0 million yuan in 2024, up 74.94% to 99.94% year on year; net profit without return to mother is 63.50 million yuan to 73.0 million yuan in 2024 Q1, an increase of 97.00% to 126.47% year on year. The pre-increase in the company's performance in the first quarter of 2024 was mainly due to the increase in customer orders, and the increase in gross margin due to the increase in gross margin due to the acceleration of Chinese automakers going overseas; on the other hand, the price of the company's main raw materials declined compared to the same period last year, and the increase in product gross margin led to the company's profit growth; at the same time, with the steady development of the Kaixiang business in Wuxi, its business also boosted the company's overall profitability.

Client: The basic disk business fully benefits from major customer bundles+high quality new energy customer volume.

The company's main business segments are stamping parts, sub-assembly processing services, molds and selective precision electroplating business. Among them, stamping parts business, split assembly processing business, and mold business are the company's base business. After completing the transfer and merger of 100% of the shares in Wuxi Kaixiang in 2023Q1, a selective precision electroplating business was added. 1) In-depth cooperation with SAIC Motor Group: The company provides support for various new energy models such as SAIC Volkswagen, SAIC-GM, and SAIC passenger cars, and the company's Zhengzhou plant and Ningde factory are the sole vehicle body assembly processing business suppliers for SAIC Passenger Vehicle's Zhengzhou Plant and Ningde Plant, respectively. According to SAIC Motor's 2023 annual report, SAIC Motor sold 5.02 million vehicles throughout the year in 2023, with a target sales volume of 5.45 million units in 2024, and the company is expected to continue to benefit; 2) New energy customers continue to expand their sales volume: the company focuses on developing NEV manufacturer customers. According to the company's 2022 annual report, the proportion of new NEV products that the company has taken on has exceeded 60% in 2022. The new energy customers the company cooperates with include high-quality new energy customers such as Tesla, Ideal Auto, and Zhiji Auto. Among them, the total delivery volume of Ideal Auto reached 80,400 vehicles in the first quarter, an increase of 52.9% over the previous year. We judge that as the sales volume of downstream new energy customers continues to grow, driving the production-side scale effect and the continuous expansion of high-quality downstream customers, the company's revenue and profit situation is expected to achieve double optimization; 3) Fundraising and production expansion to strengthen the stickiness of downstream supporting cooperation: In December 2023, the company issued a convertible bond plan to raise 900 million yuan to expand the Zhengzhou and Shanghai Lingang plants. The construction of this project is expected to improve the company's nearby support capabilities for key customers, further reduce communication and transportation costs between the company and customers, and meet the needs of downstream automakers for simultaneous development and rapid response. Increase customer stickiness with core customers.

Profit side: Benefiting from the scale effect+fall in raw material prices+the consolidation of the electroplating business, the company's profitability is expected to continue to improve. 1) The company's main raw materials include large upstream raw materials such as steel, iron, and aluminum. According to the comprehensive steel price index, the year-on-year decline in the steel relative price index in Q1 in '24 is expected to drive up the company's profitability; 2) Wuxi Kaixiang's steady operation and high profit margin level. 2020-2022H1 has comprehensive gross margins of 78.73%, 82.97%, and 81.67%, respectively. The return on net assets and net sales interest rate both exceeded 50%, which is expected to continue to drive the company's profit growth.

The profit forecasting and investment rating company is an experienced parts manufacturer. The basic division assembly processing business is tied to the steady development of SAIC passenger cars. The main business of auto parts stamping and welding and related mold businesses benefit from customer expansion and downstream customer volume is expected to achieve rapid growth. We expect the company to achieve operating revenue of 22.36, 29.29, and 3.447 billion yuan in 2023-2025, with year-on-year growth rates of 28%, 31%, and 18%; net profit to mother of 2.7, 3.7, and 430 million yuan, with year-on-year growth rates of 239%, 34%, and 18%; EPS of 1.1, 1.5, and 1.7 yuan, corresponding PE valuations of 21, 15, and 13 times, respectively. We are optimistic about the company's future development, cover it for the first time, and give it an “increase in weight” rating.

Risk warning 1) Orders from major customers fell short of expectations; 2) New customer development and business volume fell short of expectations; 3) increased competition in the parts industry; 4) risk of large fluctuations in raw material prices; 5) risk of falling demand in the original business due to the application of new technology; 6) passenger car sales fell short of expectations.