Key points of investment

Incident: The company released its annual report for 23 years, and achieved revenue of 4.20 billion yuan, +27% year over year, 980 million yuan, +48% year over year, minus 940 million yuan, and +60% year over year. Among them, 23Q4 achieved revenue of 1.33 billion yuan, +44% year over year, 310 million yuan, +61% year over year, deducted not 310 million yuan, and +61% year over year. The gross margin for '23 was 41.90%, +3.67pct, Q4 gross margin 45.73%, +6.39pct, +2.42pct month-on-month; 23-year net profit margin was 23.39%, +3.32pct, Q4 net profit margin was 23.63%, +2.54 pct yoy, and +0.32pct month-on-month.

Profitability has increased dramatically, and performance has greatly exceeded market expectations.

AMI system solutions have become mainstream, and multiple markets are blooming everywhere to welcome high growth. In '23, the company's smart electricity segment achieved revenue of 3,595 billion yuan, +24% year on year, gross margin of 43.85%, +5.15 pct year on year. Its domestic electricity revenue in China was 1,034 billion yuan year on year, -5% year on year, and overseas electricity revenue was 2,561 billion yuan year on year, +42% year over year. The gross margin has increased dramatically. We think it is mainly due to 1) the sharp increase in the revenue share of system software and solutions; 2) the decline in raw material prices; and 3) the impact of RMB depreciation. The company's overseas electricity business ushered in a period of rapid development. The revenue in Africa/Asia/Latin America/Europe was +157%/32%/4%/428%, respectively, and revenue growth in Africa and Asia (excluding mainland China) was fast. We believe this is mainly due to a significant increase in the number of AMI system solutions delivered. The company has successively established companies in Portugal, Spain and Romania to vigorously expand the high-end European market, and achieved a revenue volume of over 100 million in 23 years. At the same time, the company expects to establish production bases in Mexico, Nigeria and other countries to continuously expand the global supply chain. Looking ahead to 24 years, the company is expected to achieve steady growth in overseas electricity consumption with strong on-hand orders.

Domestic electricity distribution is under slight pressure, and overseas distribution & new energy sources are growing at an accelerated pace. 1) The domestic electricity distribution market was under pressure in '23. Electricity consumption/distribution revenue was -5%/-5% year-on-year, mainly due to State Grid's second batch of electricity meter tenders in '22/ -33% YoY. Distribution side investment is expected to decline due to pressure on the main grid side, and the company's domestic electricity distribution business is under slight pressure.

However, the volume of tenders for the second batch in '23 and the first batch in '24 was +76%/84%. Demand recovered strongly. Distribution network investment is also expected to rebound steadily to solve distributed consumption problems, and the company's domestic business is expected to grow steadily in '24. 2) Overseas power distribution/new energy revenue was +407%/672%. The company's overseas channels gradually showed their advantages on the power distribution and new energy side, achieving winning bids and delivery of new energy products in African, European and Latin American markets, and overseas microgrid & integrated energy management EPC projects. It is expected to maintain rapid growth in 24 years.

The cost control effect is remarkable, the cash flow performance is excellent, and the on-hand orders are sufficient. The cost rate for the 23-year period was 13.64%, -5.83pct year over year. Among them, sales, management, R&D, and finance expense ratios were 7.41%, 3.77%, 6.53%, and -4.07%, respectively, with year-on-year decreases of 1.37 pct, 0.52 pct, 0.68 pct, and 0.41 pct. The net cash flow from operating activities in 2023 was 1.01 billion yuan, +63% year-on-year, and operating cash flow was abundant. Contract debt at the end of the period was 209 million yuan, +60% compared to the beginning of the year, and there were sufficient on-hand orders, providing the foundation for rapid growth in 24 years.

Profit forecast and investment rating: Considering that the company's AMI system solutions exceeded expectations and overseas market expansion exceeded expectations, our net profit for 24-26 was 12.1 (+1.7) /15.1 (+2.5) /1.70 billion yuan, +23% year-on-year, respectively. The PE corresponding to the current price was 17x, 13x, and 11x, respectively, maintaining the “buy” rating.

Risk warning: Overseas new market expansion falls short of expectations, domestic market competition intensifies, overseas project execution progress falls short of expectations, etc.