Incident: In 2023, the company achieved operating income of 1.51 billion yuan, a year-on-year increase of 12.7%; achieved net profit of 200 million yuan, a year-on-year decrease of 10.4%; net profit after deducting non-return to mother was 160 million yuan, a year-on-year decrease of 16.6%. In the fourth quarter of 2023, the company achieved revenue of 420 million yuan, an increase of 28.5% year on year; realized net profit of 40 million yuan, an increase of 13.4% year on year; net profit after deducting non-return to mother was 0.3 billion yuan, an increase of 28.7% year on year.

Profitability is under pressure in the short term, and R&D investment remains high. Profit side: In 2023, the company's gross sales margin/net margin was 35.8%/13.2%, down 1.5/3.4pp; the Q4 gross margin/net margin was 39%/8.9%, respectively, +7.3/-0.4pp. Cost side: The company's sales/management (excluding R&D) /finance expenses in 2023 was 9.4%/4.6%/-0.3%, respectively, compared with +1.1 pp/ -0.1 pp/+0.04 pp. Among them, the increase in sales expenses was mainly due to the company strengthening marketing network construction, and labor costs and expenses both increased.

The company's R&D expenditure rate in 2023 was 9.8%, an increase of 0.8 pp over the previous year, and the high R&D investment stabilized its competitive advantage.

Servo gross margin is rising steadily, and product iteration reduces costs and increases efficiency. In 2023, the company's servo system achieved revenue of 730 million yuan, a year-on-year increase of 22.7%, gross margin of 24.3%, and a year-on-year increase of 0.4 pp. Through independent research and development, the company launched the DS5 series high-performance servo. The product has excellent performance, stability and reliability, and the sales share continues to increase. The company's servo business has been applied in various fields such as 3C, electronics manufacturing, textiles, packaging, etc. With the gradual investment in automated motor production lines and the continuous increase in the self-control rate of encoders, the gross margin of the servo business is expected to further improve. In addition, the company actively promotes the application of products such as inverters and stepper motors. The VH5 and VH6 series inverters have been widely praised by the market, the turnover has grown rapidly, the product matrix continues to improve, and the integrated industrial control layout drives long-term stable development.

The PLC business is growing steadily, and the domestic replacement rate is expected to gradually increase. In 2023, the company's PLC business achieved revenue of 540 million yuan, a year-on-year increase of 4.8%, and a gross margin of 54%, maintaining a high position. The company's small PLC has an obvious first-mover advantage. It has a certain scale effect, and continues to invest in R&D for medium and large PLCs. Currently, the localization rate of medium and large PLCs in the domestic market is low, and the market share is mainly occupied by foreign investors such as Siemens and Omron. The company is expected to use technology accumulation to achieve rapid product breakthroughs and accelerate domestic replacement.

The smart device business started rapidly, and gross margin increased. The company's intelligent device business includes machine vision, complete solutions, industrial robots, etc. The core components all have independent intellectual property rights, and machine vision products have strong technical advantages. In 2023, the company's smart device business revenue was 40 million yuan, up 54.5% year on year, gross margin was 24.4%, up 3.7 pp year on year.

Profit forecasting and investment advice. The company's revenue for 2024-2026 is expected to be 1.72 billion yuan, 1.97 billion yuan and 2.22 billion yuan respectively, and the net profit growth rate for the next three years will be 19.8%/18.5%/16.8%, respectively. The company's products are being iterated at an accelerated pace and have strong competitive strength. They are expected to benefit from the recovery of traditional downstream industries, promote the recovery of the company's performance and maintain a “holding” rating.

Risk warning: the risk of product prices falling due to increased competition; the risk of rising raw material prices; the risk that product development falls short of expectations; the risk that the recovery of traditional downstream industries falls short of expectations.