2023 and 1Q24 results are in line with our expectations
Higashiyama Precision announced 2023 results: operating income of 33.651 billion yuan, up 7% year on year, net profit to mother of 1,965 billion yuan, down 17% year on year, basically in line with our expectations. Corresponding to the 4Q23 single quarter, Dongshan achieved operating income of 11.151 billion yuan, a year-on-year increase of 27%, and net profit to mother of 632 million yuan, a year-on-year decrease of 20%.
Meanwhile, Dongshan announced 1Q24 results: operating income of 7.745 billion yuan, a year-on-year increase of 19%, net profit to mother of 289 million yuan, a year-on-year decrease of 39%, and net profit after deducting non-return to mother of 261 million yuan, a year-on-year decrease of 7%, which is basically in line with our expectations. We believe that Dongshan's 1Q24 performance is under pressure, mainly due to: 1) 1Q23's acquisition of Jingrui generated a negative goodwill of 159 million, increasing current profit, causing 1Q24 net profit to fall 39% year on year, but net profit after deducting non-return to mother fell by only 7%, which is significantly less; 2) LED downstream demand continues to weaken, and related business operations continue to be under pressure, dragging down the company's profitability.
By business in 2023:1) PCB business: achieved revenue of 23.261 billion yuan, a year-on-year increase of 7%, gross margin decreased 0.22ppt to 20.79%, and profitability was basically stable; 2) LED display business:
Revenue of 1,190 billion yuan was achieved, down 29% year on year, and gross margin fell 35.48ppt to -26.67%. We believe that the main reason was that the company's operating rate was insufficient due to falling demand in the LED industry, compounding market competition intensified price decline and further dragged down profits; 3) Panels and LCD modules: achieved revenue of 4.162 billion yuan, down 8.45% year on year, and gross margin increased 0.47ppt to 1.77%, and profit was relatively stable.
Development trends
AI phones drive FPC upgrades, and Higashiyama related products are expected to benefit significantly. We believe that the current AI trend of the world's leading mobile phone brands is clear. Samsung, MOV and other brands have all released related models. We believe that leading brands will accelerate the deployment of the AI terminal market in the future. As a core component for signal and data transmission in consumer electronics terminals, we believe it is also expected to benefit from the AI upgrade trend. Both line width and line spacing are expected to continue to shrink and increase the value of stand-alone devices. As Apple's core supplier, Dongshan is expected to fully benefit.
The new energy business is improving steadily. According to the company announcement, the 1Q24 Dongshan New Energy business increased 56% year-on-year to 1,829 billion yuan. We are optimistic that the 4680 battery structural parts, soft board, HUD and display module businesses will steadily improve in the future, and will continue to drive Dongshan's revenue and profit growth.
Profit forecasting and valuation
Considering weak downstream demand for consumer electronics and increased LED competition, we lowered Dongshan 2024e EPS by 6% to 1.39 yuan and introduced 2025e EPS by 1.58 yuan. The current stock price corresponds to 2024/25e10.2/8.9x P/E. We maintain our outperforming industry rating. Considering the downward shift in the industry valuation center, we lowered our target price by 22% to 18.0 yuan, corresponding to 2024/25e 13.0/11.4x P/E, and there is still room for 28% increase compared to the current one.
risks
Demand for downstream consumer electronics terminals is weak; development in new fields such as new energy is falling short of expectations.