Event: Songlin Technology released quick results reports for the first quarter of 2023 and 2024. In 2023, the company achieved operating income of 2,983 billion yuan, a year-on-year decrease of 6.21%; net profit to mother was 353 million yuan, an increase of 35.18% over the previous year; net profit after deducting net income of 357 million yuan, an increase of 24.11% over the previous year. Among them, 2023Q4 achieved operating income of 789 million yuan, up 13.65% year on year; net profit of 49 million yuan, up 51.15% year on year; net profit after deducting net income of 67 million yuan, up 125.27% year on year. The 24Q1 company expects to achieve net profit of 103 million yuan to 123 million yuan, an increase of 135.66% to 181.42% over the previous year; net profit after deduction is expected to be 95 million yuan to 115 million yuan, an increase of 138.74% to 189.00% over the previous year.

Kitchen and bathroom health is picking up season by season, and beauty and health are developing rapidly

The company is positioned on the IDM model strategy to build an “IDM category champion incubation platform for health hardware”, continuously integrating R&D innovation and industrial design into products, and continuously increasing R&D investment to maintain the company's leading position in the industry. By product, 1) In terms of kitchen and bathroom, the company's kitchen and bathroom orders are recovering quarterly along with inventory removal from overseas markets, easing inflation, and recovering demand. The company expects a slight decline in revenue for the full year of '23. Industry demand is expected to benefit from a recovery in demand related to the real estate chain after the US interest rate cut. The company will also continue to generate new products and functions through product systematization, integration, and technological innovation to expand new types of brand customers to achieve growth. 2) In terms of beauty and health, according to Jiuqian data, online sales of beauty devices in China increased 29% year-on-year to 13.1 billion yuan in '23. The company has many patents and has mastered many core technologies. Currently, product revenue mainly comes from beauty showers and beauty devices, and has established cooperative projects with many major customers around the world. In 23 years, the volume of beauty and health care has increased by 79% to 259 million yuan over the same period last year. The company will continue to develop new customers and new projects, and reserve new products such as hair care devices and hair removal devices. It is expected to form a new growth curve in the medium term.

Looking at the subregion, 1) In terms of the domestic market, the company's share of domestic sales increased slightly to 34% year on year. Therefore, we estimate that the company's domestic market revenue remained stable in '23, and the growth rate was slightly higher than that of overseas markets. 2) In overseas markets, according to the company's announcement, the company's revenue in the US market basically recovered to the same level in October 23, while the European market company successfully developed new fields and new types of customers, but due to slow recovery in market demand, the company's European market revenue in October '23 was still being repaired.

Divestment of the “Song Lin Family” business and complete the complete acquisition of Beijet

The company previously held 51% of Beijet's subsidiary Bejet, which was mainly engaged in urea-formaldehyde covers and smart toilet foundries. The company hopes to upgrade Beijet from traditional foundry and processing business to mainly operate under the IDM model. By increasing R&D and innovation efforts, improving product competitiveness, developing high-end customers, and seizing the dividend period for smart toilet business development, the company acquired the remaining 49% of Beijet's shares in November 23, which will accelerate the implementation strategy of R&D integration. In addition, the company divested the “Songlin Family” business in 23Q3, mainly because 1) “Songlin Family” is still in the new model exploration and verification stage, and the capital and time costs required are high; 2) the “Songlin Family” and “Health Hardware IDM” businesses have differences in product categories, business operation models, major suppliers, major customer groups, sales channels, production processes, and main equipment. “Songlin Family” has been in a state of loss for a long time. 23Q1-3 lost 76 million yuan. After the divestment, the company's net profit can reduce losses, and at the same time, it can invest more resources in the “Health Hardware IDM” business, further enhancing its core competitiveness.

To build the first overseas production base. The Vietnam project guarantees supply chain security. In October 2023, the company announced plans to build a smart health hardware production base project in Vietnam. The total investment amount of the project is expected to be no more than 50 million US dollars. The main plan is to assemble plastic products. In February 2024, the company increased the registered capital of its Vietnamese subsidiary, which was adjusted from US$10 million to US$16 million. It is expected that supply chain security will be further guaranteed after the gradual completion of the first overseas production base.

Profitability has improved markedly. The equity incentive target shows rapid growth. Confidence in 2023 will benefit from the optimization of the company's product structure, depreciation of the RMB, lower raw material prices, and an increase in the profitability of the kitchen and bathroom health business. Taken together, the company's net interest rate to mother in 2023 was 11.7%, an increase of 3.6 pct over the previous year. The company plans to implement restricted stock incentives in January 2024, awarding 6.975,000 restricted shares to 116 employees for the first time. The performance conditions for lifting sales restrictions this time are based on net profit returned to mother in 2022. Net profit growth rates for 2024, 2025, and 2026 were not less than 80%, 120%, and 160%, respectively, and the corresponding annual net profit to mother was 470/575/679 million yuan, respectively.

Investment suggestions: The company actively promotes product structure optimization and upgrading while maintaining advantages such as original channels and product development, and establishes connections with customers of various beauty and health products at home and abroad. Beauty and health products are expected to become a new performance growth point. We expect Songlin Technology's revenue for 2023-2025 to be 29.83, 35.93, 4.469 billion yuan, up -6.20%, 20.44%, 24.38%; net profit to mother will be 3.53, 4.92, and 600 million yuan, up 35.22%, 39.56%, 21.74% year-on-year, corresponding PE of 21.4x, 15.3x, 12.6x, and a target price of 26.50 yuan for 24, maintaining the buy-A investment rating.

Risk warning: Industry competition increases risk; raw material prices fluctuate greatly; downstream demand falls short of expectations risk.