Incidents:
On April 17, 2024, Wuxi Zhenhua released its 2023 annual report. In 2023, it achieved operating income of 2,317 billion yuan, up 23.19% year on year; realized net profit of about 277 million yuan, up 71.23% year on year; realized net profit withheld from non-mother was 266 million yuan, up 266.43% year on year, all near the median value of the 2023 performance forecast, in line with expectations.
Key points of investment:
Revenue and profit increased rapidly in 2023, and gross margin increased significantly. The company achieved revenue of 2,317 billion yuan in 2023, an increase of 23.19% over the previous year. Among them, the stamping parts business/ assembly processing business/ selective precision electroplating processing business/ mold business achieved revenue of 12.72/5.91/1.53/128 million yuan respectively, up 7.6%/64.6%/14.2%/39.9% year on year.
Among them, in the fourth quarter of a single quarter, the company achieved revenue of 701 million yuan, an increase of 31.48%/8.34% year-on-month, and realized net profit of 111 million yuan, and a year-on-month increase of 100.95%/45.34%, respectively. The company's revenue and profit increased dramatically in 2023, mainly benefiting from the increase in production and sales scale demand in the automotive industry. Ningde Zhende and Zhengzhou Junrun's production capacity was gradually released, supporting volume gradually increased, and the split assembly business rose sharply. In terms of profitability, the company's overall gross margin in 2023 was 25.07%, up 9.67pct year on year; net margin was 11.97%, up 7.34pct year on year. Among them, the gross profit margin of the stamping parts business was 8.57%, up 5.20 pct year on year; the gross profit margin of the split assembly business was 41.57%, up 8.17 pct year on year. We judge that the company's profitability has increased dramatically. On the one hand, it has benefited from the scale effect brought about by the decline in upstream raw material prices and the release of production capacity. In 2023, the company focused on reducing the cost of production materials and improving automation to improve cost control. Through a series of procurement strategy optimizations, such as signing rebate agreements, localizing and replacing part of the hardware in integrated projects, and delayed warranty service periods through robot price comparison negotiations, etc., the annual cost reduction work was achieved.
The customer structure has been optimized, and the sales ratio of new energy sources continues to increase. On the one hand, the company actively embraces new car builders such as Tesla, Ideal Auto, Xiaomi, Anhui Volkswagen, Dongfeng Rantu, and Zhiji Auto. On the other hand, it actively supports new energy models for old customers such as SAIC Volkswagen, SAIC-GM, and SAIC passenger cars, and grasps the field of traditional energy and new energy vehicle parts in both directions. According to the company's 2023 annual report, the company's new energy sales reached 30% of total sales in 2023, and this ratio is expected to exceed 50% in 2024. We believe that the company's continued expansion of new energy customers will drive the company's revenue to continue to rise.
The production capacity layout continues to be improved, and downstream support is strengthened by raising capital to expand production. By the end of 2023, the company had established 9 production bases and had formed a multi-location joint layout of “Wuxi+Shanghai+Zhengzhou+Ningde+Wuhan+Langfang”. In addition, in December 2023, the company released a convertible bond plan to raise nearly 900 million yuan to expand the Zhengzhou and Shanghai Lingang plants. The construction of this project is expected to improve the company's ability to support key customers nearby, further reduce communication and transportation costs between the company and customers, meet the needs of downstream vehicle manufacturers for simultaneous development and rapid response in a timely manner, and enhance customer stickiness with core customers.
The profit forecasting and investment rating company is an experienced parts manufacturer. The basic division assembly processing business is tied to the steady development of SAIC passenger cars. The main business of auto parts stamping and welding and related mold businesses benefit from customer expansion and is expected to achieve rapid growth in downstream customer volume. Based on the company's latest situation, we adjusted the company's profit forecast accordingly. We expect the company to achieve operating income of 29.31, 35.46, and 4.185 billion yuan in 2024-2026, with year-on-year growth rates of 27%, 21%, and 18%; net profit to mother of 3.67, 4.46, and 521 million yuan, with year-on-year growth rates of 32%, 22%, and 17%; EPS is 1.5, 1.8, 2.1 yuan, and corresponding PE valuations of 14, 11, and 10 times, respectively. We are optimistic about the company's future development and maintain an “increase” rating.
Risk warning 1) Orders from major customers fell short of expectations; 2) New customer development and business volume fell short of expectations; 3) increased competition in the parts industry; 4) risk of large fluctuations in raw material prices; 5) risk of falling demand in the original business due to the application of new technology; 6) passenger car sales fell short of expectations.