Key points of investment

2024Q1 revenue was +6% YoY, net profit to mother +8% YoY, net profit not to mother +16% YoY. The performance was in line with market expectations. The company released its 2024 quarterly report. In 24Q1, it achieved operating income of 3.453 billion yuan, a year-on-year increase of 5.79%; realized net profit of 356 million yuan, an increase of 7.76% year on year; realized net profit without return to mother of 333 million yuan, up 15.99% year on year. The Q1 gross margin was 34.94%, +1.0 pct year over year and -6.3 pct month on month. The performance was in line with market expectations.

Electric vehicles, electricity, and automobiles are doing well in Q1 and are growing month-on-month, and we expect them to all grow by more than +20% year over year. Domestic and foreign demand continues to grow rapidly. High-voltage DC relays benefit from the increase in global electric vehicle penetration rate & expansion of new markets for charging and energy storage. Domestic and foreign demand for automotive relays is strong, and product structure optimization is obvious. PCBs and high-current products are expected to be 30% +; power relays benefit from the increase in domestic meters and the rapid growth+share increase in overseas meters, and continue to grow rapidly.

Weak recovery & inventory removal continues in some industries. 1) We expect single-digit year-on-year growth for home appliances/signals/low voltage, continuing to recover slowly, domestic appliances entering the peak demand season, signal security demand bottoming out, medical & testing equipment growing well, and low voltage appliances, HVAC & new energy & industry to continue to grow. 2) New energy and industrial control are expected to decline by more than 20% year on year, and are still being removed from storage. It is expected that H2 demand will begin to recover.

Inventory turnover improved markedly, contract liabilities increased, and cash flow declined significantly. The net cash flow from 2024Q1 operating activities was $242 million, -224.15% year-on-year, mainly due to a decrease in bill discounts and an increase in wage expenses and taxes compared to the same period last year. Cash obtained from sales of goods amounted to $2,582 million, -3.46% year-on-year. Contract liabilities at the end of the period were $57 million, up 7.91% from the beginning of the year. Accounts receivable at the end of the period were $3,645 million, up 20.13% from the beginning of the year, and the number of accounts receivable turnover days increased by 6.58 days to 97.80 days. Inventory at the end of the period was 2.32 billion yuan, down 218 million yuan from the beginning of the period; the number of inventory turnover days decreased by 20.92 days to 97.80 days.

Profit forecast and investment rating: We maintained net profit of 16.1/18.4/210 billion yuan for 24-26, +15%, and +14% year-on-year, respectively. Considering Hongfa's leading position in the world, we gave it 25 times PE for 24 years, with a target price of 38.5 yuan to maintain a “buy” rating.

Risk warning: macroeconomic downturn, raw material price increases exceeding expectations, etc.