FY23 fell short of our expectations. The 1Q24 performance was in line with our previous expectations that the company released its 2023 annual report and 2024 quarterly report: achieved revenue of 13.861 billion yuan in 2023, -2.6% year over year; realized net profit of 91 million yuan, -85.4% year over year; actual non-return net profit of 0.06 billion yuan, -98.8% year over year, lower than our previous expectations. We judge that the main reason is 1) the pace of downstream IoT recovery is slow, and 2) pre-expenditure is dragging down profitability. Corresponding to the single quarter of 4Q23, the company achieved revenue of 3.894 billion yuan, -4.88% year on year; net profit to mother was 109 million yuan, or -41.95% year-on-year. In the 1Q24 quarter, the company achieved revenue of 3,954 billion yuan, +26.06% year-on-year; net profit to mother was 55 million yuan, in line with our previous expectations.
Development trends
Revenue shows a quarterly improvement trend, and we are optimistic about the long-term development space. According to Counterpoint, communications module market shipments in 2023 fell 2% year on year. Corresponding to the company level, revenue in 2023 is under relative pressure. By region, domestic business achieved revenue of 6.571 billion yuan (YoY +0.60%) and overseas business achieved revenue of 7.290 billion yuan (-5.30% YoY) in 2023. We see that since the second half of 2023, with the gradual recovery of demand in the IoT industry, the company's revenue showed a gradual improvement trend. 4Q23 sales increased 12.72% month-on-month, and 1Q24 achieved a year-on-month revenue growth of 26.06%/1.54%. Looking forward to the future, we are optimistic that the Internet of Things will continue to expand, driven by the digital/intelligent transformation of society. According to the “2024 Mobile Economy Report” issued by GSMA, the number of global authorized spectrum cellular IoT connections in 2023 is 3.5 billion, and the number of global authorized spectrum cellular IoT connections is expected to reach 5.8 billion in 2030. We believe that as a global leader in IoT modules, the company is expected to benefit from the accelerated penetration of the Internet of Things.
Short-term gross margin fluctuated, and expenses were well controlled in a single quarter. In terms of gross margin, 4Q23 gross margin was -0.80ppt to 20.42% yoy, and 1Q24 gross margin was -0.67ppt to 16.93% yoy. The company continues to explore the vertical market for communication modules such as automotive modules and smart modules, and is laying out new businesses such as ODM and antennas. In terms of cost ratios, the development of new product lines and businesses requires large R&D investment in the short term. R&D expenses in 2023 reached 1.604 billion yuan, a year-on-year increase of 20.19%, which is a drag on annual net profit; we see that the company actively adjusts business strategies, strictly controls R&D and increases project input/output ratio, increasing unit personnel output. 1Q24 single quarter sales/management/R&D expense ratio is -0.43pp/-1.20pp/-0.67ppt, year-on-year -0.94pp/ -0.67pp/ -4.39ppt. We believe that the new business and new product line are expected to open up the company's size ceiling, and we are optimistic that cost control will drive a steady recovery in profitability.
Profit forecasting and valuation
Considering that short-term gross margin fluctuations drag down profitability, we lowered 2024 net profit by 26% to 443 million yuan, and introduced net profit of 625 million yuan in 2025 for the first time. The current stock price corresponds to 2024/2025 22.4/15.9 times P/E. Maintaining an outperforming industry rating, taking into account profit forecast adjustments and our optimism about the long-term development space of IoT communication modules, the target price was lowered by 17% to 46.92 yuan based on 28.0 times 2024 P/E, corresponding to 19.8 times P/E in 2025, with 25% upside compared to the current stock price.
risks
Competition in the industry intensified; IoT development/cost control/new business development fell short of expectations.