The company released its 2023 annual report: In 2023, the company achieved annual revenue of 1,320 million yuan, +8.34% year on year, net profit of 219 million yuan, -1.59% year-on-year, gross profit margin of 36.42%, year-on-year, -2.3 pct, net profit margin 16.62%, and year-on-year. In the 23Q4 quarter, the company achieved revenue of 393 million yuan, +27.27% year on year, net profit of 50 million yuan, -7.32% year-on-year, gross profit margin of 33.39%, year-on-year -6.45pct, net profit margin of 12.76%, and -4.71 pct year on year.

The release of production capacity+high-end products ensures the steady development of the tool business, and the recovery in demand may unleash performance elasticity. In 2023, the company's tool business achieved revenue of 1,042 billion yuan, +0.56% year-on-year, and achieved a gross profit margin of 34.53%, or -2.25pct year-on-year. By product, 1) PCB drills: Demand was low and high throughout the year, and picked up in the second half of the year. We expect the company to ship around 700 million drills in '23, and the average price of the product will be pressured by weak downstream demand. Looking ahead, we believe that the increase in demand for high computing power due to the development of artificial intelligence is expected to drive the growth in demand for upstream high-performance PCBs and lay the foundation for medium- to long-term demand growth for PCB processing tools. Furthermore, in terms of going overseas, the company actively prepared to build a factory in Thailand in '23, and is expected to increase production capacity by 3 million units/month during the trial production phase. We believe that the role of the Thai factory is mainly reflected in: first, providing effective capacity supplementation; second, being close to customers to facilitate order acceptance and service; and third, meeting customers' needs to ensure supply chain safety. 2) CNC tools: The newly funded production capacity was adjusted from 1.8 million units/year to 9.6 million units/year. After the project is delivered, the overall production capacity is expected to rise to about 12 million units/year. Currently, the business has expanded to 3C (including titanium alloys), automobiles, aerospace, dentistry, etc., and the scenarios are gradually being enriched, contributing to increased performance.

Mobile phone films have achieved explosive growth, and automotive films are expected to continue to gain strength. In '23, the company's functional membrane materials achieved revenue of 897.782 million yuan, +229.81% year-on-year, and achieved gross margin of 15.87%.

By product, 1) Mobile phone film: It is positioned as a mid-range high-end, has domestic replacement properties, and has achieved stable batch supply. We believe that it initially highlights cash cow properties and lays the foundation for the overall sustainable development of the subsequent film business; 2) Vehicle film: It has passed sample testing and small-batch verification by some customers, and the prospects are promising. According to CINNO Research data, global automotive display shipments are expected to increase from 192 million to 267 million in 2022 to 2030, with a considerable market volume. 3) Explosion-proof film: It has gradually entered the certification system of downstream manufacturers in the fields of Mini LED, automotive, smart home, etc., and batch supply has begun one after another.

Intelligent CNC equipment has achieved high growth from self-use to export sales, and new scenarios will expand or be expected in the future.

In 2023, the company actively promoted intelligent CNC equipment from self-use to export sales, achieving revenue of 47.5056 million yuan, +278.55% over the same period last year, with a remarkable growth rate. On the product side, the company's export equipment includes CNC tool grinders, CNC taper thread grinders, fully automatic tool passivation machines, CNC step grinders, vacuum coating equipment, intelligent drill storage systems, etc., and it is worth looking forward to the expansion of new downstream scenarios in the future.

On the sales side, the company has set up a professional equipment marketing team and actively participated in domestic and foreign CNC machine tool exhibitions. With stable, reliable product quality and high performance characteristics, market sales channels are gradually opening up.

Investment advice

The company is a leading global PCB drill company. Through high-end products and capacity expansion, the company continuously strengthens its core competitiveness. At the same time, functional film products, CNC tools, and automation equipment that have been in place for many years have blossomed, and the future is promising. We expect that in 2024-2026, the company will achieve revenue of 1,703/21.04 billion yuan, respectively, up 29.03%/23.49%/23.43% year on year; net profit to mother of 3.32/4.17/ 505 million yuan, up 51.34%/25.60%/21.17%, respectively. The current stock price corresponds to the 24-26 valuation of 22/18/15 times, respectively, maintaining a “buy” rating.

Risk warning

Downstream market demand falls short of expectations, PCB drill technology replacement risks, sharp fluctuations in raw material prices and supply risks, the company's production capacity release falls short of expectations, new business expansion falls short of expectations, etc.