On April 9, 2024, Kangguan Technology released its 2023 annual report.

The company's revenue for 23 exceeded expectations. The company achieved annual revenue of 13.4 billion yuan, a year-on-year increase of 16.1%, achieved net profit of 1.28 billion yuan, a year-on-year decrease of 15.4%, and realized net profit deducted from non-return to mother of 1.23 billion yuan, a year-on-year decrease of 13.1%; of these, Q4 achieved operating income of 4.89 billion yuan, a year-on-year increase of 95%, and realized net profit to mother of 860 million yuan, an increase of 13.2% year-on-year.

Looking at the breakdown, 1) Smart TVs achieved annual revenue of 7.29 billion yuan, an increase of 32% over the previous year. Of these, H2 alone achieved revenue of 4.80 billion yuan, an increase of 58% over the previous year. The company shipped 7.31 million TVs throughout the year, an increase of 37.3% over the previous year. Among them, Element TV Company, LP (Amazon ONN TV) became the company's second-largest customer, contributing 660 million yuan in annual revenue. According to Dixian Technology data, the company's TV OEM shipped 1.6 million units in the first quarter of '24, up 16% year on year. Shipment growth in Asia, Africa, and Latin America boosted overall shipments. Considering the scattered invoices in emerging regions and the company's bargaining power is relatively strong, we expect the structural impact of increased shipments in Asia, Africa, and Latin America to increase the company's profit per unit year over year; 2) Smart interactive tablets contributed 300 million yuan to annual revenue, down 9.0% year on year. The company's interactive tablet business continued to be pressured by factors such as demand pressure from Europe and the US, and a high base, but the professional e-sports business continued to be pressured during the year by factors such as demand pressure from Europe and the US, and a high base. The push of the screen Following rapid development, the company shipped 1.43 million e-sports screens throughout the year, a sharp increase of 241% over the previous year; 3) Innovative display products. The company disclosed revenue separately for the first time, achieving annual revenue of 960 million yuan, a sharp increase of 129% over the previous year. The company's three major brands, “KTC,” “Horion (Horion),” and “Forbit FPD,” rapidly expanded during the year, while driving high growth in the innovative OEM business. Currently, the company's innovative categories have formed nearly 20 types of business lines. According to Jiuqian data, in the first quarter of 2024, the total GMV of the KTC display (including smart screen) JD+Tmall platforms reached 120 million yuan, an increase of 150% over the previous year, continuing the high growth trend of the previous period.

In terms of profit, the company's gross margin fell 8.9 pct to 18.2% year on year in the fourth quarter. We estimate that it was mainly affected by the sharp increase in revenue share in North America in the fourth quarter and the dilution of processing costs due to the increase in panel prices; on the cost side, the company's expense ratio was drastically optimized by 3.5 points to 8.0% year on year during the fourth quarter. We estimate that it was mainly affected by the dilution of the cost ratio due to the sharp increase in revenue. Among them, the sales/management/R&D/finance expenses ratio was optimized by 0.5/1.3/ 1.1/0.6 pt year on year, respectively. In addition, the company experienced a credit impairment loss of 78.83 million yuan in the fourth quarter, which affected the company's operating profit margin down 2.6 pt year on year, mainly due to bad debt preparation accrual of accounts receivable, of which 43.66 million yuan was charged as a single item, mainly due to the fact that some accounts receivable are expected to be unrecoverable. Taken together, the company's net interest rate for the fourth quarter was 8.5%, down 6.2 points year on year.

On the asset side and cash flow, the company's year-end inventory increased 8.2% year on year, of which the book balance of raw materials reached 1.7 billion yuan, up 45% year on year. We estimate that it was mainly for early panel preparation. Considering the continued increase in panel prices in the first quarter, it is expected to boost the company's smart TV business profitability in the first quarter. In terms of cash flow, the company's net operating cash flow in the fourth quarter was 11.11 million yuan, a sharp decrease of 98% year on year, of which the revenue ratio fell to 86%. We estimate that it was mainly due to the relatively long account period of major North American customers, and that cash for purchasing goods and receiving labor payments increased 30 percent year over year % has an adverse effect on the net present ratio. We presume that it is mainly affected by the advance preparation of panels.

Release the draft 2024 Stock Options Incentive Plan. The company now plans to grant a total of 26.66 million stock options to 2154 incentive recipients, accounting for 3.89% of the company's total share capital. Of these, the total number of 5 executives, including the financial director and deputy general manager, was awarded only 600,000 shares, accounting for 2.3% of the total planned amount. The scope of incentives and incentives for middle level employees is impressive. The option exercise price is 26.52 yuan/share, which is a 3% premium over the closing price on April 8. The company's current incentive plan is divided into three assessment periods. The target value for 2024-2026 is not less than 151/174/18.8 billion yuan (corresponding year-on-year growth rate is 12%/15%/8%, respectively), and the trigger value is 2024-2026 revenue of not less than 144/163/17.5 billion yuan (corresponding year-on-year growth rate of 7%/13%/7%, respectively). The high incentive target highlights the company's operating confidence.

Profit forecasting and investment ratings. Considering the rapid development of the company's innovative business and the steady recovery of the interactive tablet business, we expect the company's revenue for 2024-2026 to be 15.2 billion yuan, 17.4 billion yuan and 18.9 billion yuan, respectively. The estimated net profit to mother will be 1.5 billion yuan, 1.73 billion yuan and 1.98 billion yuan respectively, up 17%, 15% and 15% year on year, respectively. The corresponding PE is 12.7 times, 11.0 times and 9.6 times, respectively, maintaining the “increase in holdings” investment rating.

Risk warning: Innovative business development falls short of expectations, demand for smart interactive tablets falls short of expectations, demand for TV foundry falls short of expectations, and industry competition intensifies.