Incident: On April 19, the company released its 2023 annual report. In 2023, it achieved revenue of 1.47 billion yuan, YOY -14.4%; net profit to mother of 100 million yuan, YOY -65.8%. At the same time, the 2024 quarterly report was released. 1Q24 achieved revenue of 200 million yuan, YOY -59.8%; net profit to mother - 39 million yuan, and 1Q23 was 114 million yuan. The performance was in line with market expectations. The decline in the company's performance was mainly due to the impact of the pace of downstream demand.

The pace of demand affects performance; profitability declines. 1) Looking at a single quarter: The company achieved revenue of 370 million yuan in 4Q23, YOY -1.1%; net profit to mother of 60 million yuan, and -03 billion yuan in 4Q22. Affected by the pace of demand, the company began four consecutive quarters of year-on-year decline in 2Q23; 3Q23 began losing money for three consecutive quarters.

We anticipate that as downstream demand recovers and production capacity is released, the company is expected to return to high growth. 2) Profitability:

The company's gross margin decreased by 2.3 ppt to 45.5% year on year in 2023; net margin decreased by 9.9 ppt to 7.1% year on year.

Integrated circuits and micromodules are growing rapidly; Shenzhen Leineng invests in the deployment of new energy. In 2023, by product: 1) Power supplies and motor drives: achieved revenue of 1.36 billion yuan, YoY -15.1%, accounting for 93% of total revenue, and gross margin decreased by 3.96ppt to 44.2% year-on-year; 2) Integrated circuits and micromodules: achieved revenue of 0.7 billion yuan, YoY +35.0%, accounting for 5% of total revenue. By sector: 1) High-reliability special sector: achieved revenue of 970 million yuan, YoY -7.9%, accounting for 66% of total revenue, and gross margin decreased 4.91 ppt to 57.1% year over year; 2) Communications and data center: achieved revenue of 480 million yuan, YoY -26.0%, accounting for 33% of total revenue, and gross margin decreased 0.03ppt to 21.8% year over year. Looking at subsidiary companies: 1) Shenzhen Leineng: Revenue fell 25.6% year on year to 50 billion yuan; net profit fell 55.4% year on year to 40 million yuan; 2) Wuhan Yongli: revenue fell 18.1% year on year to 200 million yuan; net profit fell 22.1% year on year to 0.2 billion yuan. In April 2023, Shenzhen Leineng invested in the establishment of “Wuhan Yiwat Digital Energy Technology Co., Ltd.” to lay out the field of new energy.

The R&D expense ratio reached 22.7% in 2023; operating cash flow improved significantly. The company's expense ratio increased by 9.2ppt to 35.5% year on year in 2023:1) the sales expense ratio increased by 0.4ppt to 4.2% year on year; 2) the management expense ratio increased by 1.8ppt to 7.6% year on year; 3) the financial expense ratio was 1.0%, compared to 1.5% in the same period last year; 4) the R&D expense ratio increased 7.5ppt to 22.7% year on year; and R&D expenses increased 22.7% year over year to 330 million yuan. By the end of 1Q24, the company: 1) accounts receivable and notes were $1.08 billion, down 6.0% from the beginning of the year; 2) prepayments of $0.2 billion, up 49.6% from the beginning of the year; 3) inventory of $1.03 billion, up 1.9% from the beginning of the year; 4) contract liabilities were $0.3 billion, up 82.1% from the beginning of the year. Net cash flow from operating activities was $40 million in 2023 and -$30 billion in 2022. From 2021 to 2022, the company's operating cash flow had a net outflow for two consecutive years. The 2023 regularization was mainly due to a year-on-year increase in repayments and a decrease in cash outflows settled with notes for material purchases.

Investment advice: The company is a leading special power supply in China. It is developing rapidly in special fields such as aerospace. Domestic and foreign demand for communication and server power supplies is strong, and the company's market share is constantly increasing. As orders gradually land in the future, performance is expected to return to high growth. We expect the company's net profit from 2024 to 2026 to be 210 million yuan, 330 million yuan, and 4.4 billion yuan respectively. The current stock price corresponding to 2024-2026 PE is 22x/14x/10x, respectively.

Considering the company's multi-category power electronics solution capabilities and domestic alternative advantages, the “Recommended” rating is maintained.

Risk warning: The progress of fund-raising projects falls short of expectations, the progress of new product development falls short of expectations, etc.