Incident: The company released its 23rd annual report and quarterly report for the year 24, with revenue of 502 million yuan -12.81% YoY, net profit to mother of 73 million yuan -7.72% YoY, 24Q1 revenue of 174 million yuan +40.70% YoY +33.40%, net profit to mother of 0.14 million yuan YoY -14.27% YoY -11.16%. Our review is as follows:

The 23-year results were dragged down by the decline in Switch sales and delays in new product projects. The company's 23-year revenue of 502 million yuan was -12.81% YoY, net profit of 73 million yuan YoY was -37.72%, deducted from non-return mother of 0.65 million yuan, -45.56% YoY, gross profit margin 34.58% yoy -1.45pcts, and net profit margin 15.05% yoy -5.26pcts. The decline in revenue is mainly due to the fact that Company N's Switch game console was in its 7th year of life cycle last year, leading to a decline in sales. At the same time, some new product projects in the game console and optical communication business were delayed. The large decline on the profit side was due to:

1) The decline in gross margin was mainly due to a decline in the share of the game console parts business with high gross margin; 2) Expense-side management and financial expenses increased significantly. The management fee ratio was +4.04pcts to 11.79% year over year, mainly due to new subsidiaries and relocation of new factories. The financial expenses ratio was +1.48pcts to -0.67% year over year, mainly due to a decrease in exchange earnings in '23.

The game console parts business was under pressure in '23, and new businesses such as optical communications and automation equipment are developing well.

By business: 1) Game console parts: revenue of 255 million yuan +33.68% year on year, revenue accounting for -15.84 pcts to 50.3% year on year. The decline was mainly due to the decline in sales of Switch game consoles, which led to a decrease in sales of slide rails and other products. The gross profit margin was 39.10% year over year -3.39 pcts. The decline was mainly due to the decline in the share of slide products with high gross margin; 2) Connectors: revenue of 190 million yuan +31.48% year on year, gross profit margin of 29.09% yoy +6.26pcts. Among them, electronic connectors showed a stable performance. optical communication There has been a certain increase in products. It is worth noting that the holding subsidiary Fukeshima's revenue reached 42,2975 million yuan and net profit reached 93.677 million yuan. In addition, the revenue for the full year of 22 was 554.241 million yuan and net profit of 9.6355 million yuan. In addition, Vietnamese factories also began to contribute revenue; 3) precision manufacturing and others: revenue of 44 million yuan +13.40% YoY, with a gross profit margin of 22.86% year-on-year, 5.61 pcts. The increase benefited from the contribution of the new automation equipment business.

The high revenue increase in 24Q1 benefited from increased demand for Fukeshima MPO/MT inserts. 24Q1 revenue of 174 million yuan +40.70% month-on-month +33.40%, net profit of 0.14 million yuan year-on-year -14.27% -11.16% month-on-month, net profit margin of -19.61% YoY +18.61% month-on-month +18.95% month-on-month, gross profit margin 38.24% yoy +2.75pcts month-on-month +5.01pcts, net profit margin 17.59% yoy +4.44pcts month-on-month.

The high increase in revenue is expected mainly from the revenue growth of our subsidiary Fukeshima. Demand for its MPO/MT connectors is currently surging as demand for downstream computing power increases. The decline in net profit to the mother was mainly due to a large decline in the game console business and an increase in minority shareholders' equity due to the addition of new subsidiaries. On the cost side, the cost ratio for marketing management and research was 4.1%/12.1%/6.9%/-2.5%, compared to +2.4/+3.2/+2.0/ -9.0pcts. The increase in management expenses was mainly due to increased managers' remuneration, depreciation expenses for industrial parks, and new subsidiaries. The decline in financial expenses was mainly due to interest expenses on bank loans in the same period last year and interest income this year.

The supply of MPO/MT connectors will still be in short supply in the short term. We are optimistic about the room for growth in the optical communication business. The release of new Switch models in the future will bring considerable performance flexibility to the company. In the short term, sales of Switch game consoles are expected to decline at the end of the life cycle, and the company is actively expanding new customers to reduce the impact. At the same time, the company's optical communication business is developing well. Fukeshima MPO/MT inserts are expected to be in short supply in the short term. The company's plug-in products are gradually increasing the price and increasing the proportion of high-end plugs, and there are still plans to expand production. Looking at the medium to long term, in terms of game consoles and XR, the new Switch is expected to be released soon. As a rare component supply chain for Company N in China, there is still room for future share growth and category expansion; in addition, the company's leading manufacturers such as card slots Meta/Sony/Pico also have room for growth; in terms of optical communication, the optical communication business will have growth prospects as demand for downstream AI computing power increases. Fukeshima MPO/MT plug-in technology is scarce in China, and it also has a joint venture with SENKO-SENKO Optoelectronics Vietnam company It is also expected to open up new growth space; in terms of equipment, new customers and new orders for the automation equipment business are continuing to be introduced. The recently announced acquisition of Xike Industrial mainly makes grinding and polishing equipment, which will broaden the application fields.

Maintain a “Highly Recommended” investment rating. The company is one of the few domestic manufacturers specializing in the production of game console parts. The optical communication business will have growth prospects as demand for downstream AI computing power increases, and it is also expanding the automation equipment business. As downstream demand gradually improves, the company's product categories and share continue to increase, which is expected to open up new growth space for the company. Based on the latest financial report, our latest forecast is 24-26 revenue of 756/10.88/1,518 million yuan, net profit to mother of 0.94/1.23/170 million yuan, corresponding PE 61.0/46.7/33.6 times. Considering that the company is a scarce domestic supplier of game console parts for Company N, and that businesses such as optical communications, XR, and equipment are expected to open up a new growth curve, as new downstream products are released in the future, the company is expected to bring more flexibility in performance than expected due to category expansion and new business expansion, and maintain a “highly recommended” investment rating.

Risk warning: Risks such as high customer concentration, changes in end customer demand, increased market competition, raw material price fluctuations, and exchange rate fluctuations.