The 2023 results met our expectations, and the 1Q24 results exceeded our expectations

The company announced its 2023 and 1Q24 results: 2023 revenue of RMB 2,775 million, net profit to mother of RMB 322 million, +7.9% YoY; corresponding 4Q23 revenue of RMB647 million, +60.0% YoY; and net profit to mother of RMB59 million, +64.9% YoY. 1Q24's revenue was 825 million yuan, +46.1% year-on-year, and net profit to mother was 85 million yuan, +102.3% year-on-year. The company's 2023 performance was in line with our expectations; the 1Q24 performance exceeded our expectations, mainly due to the volume of new customer orders exceeding our expectations.

The impact of overseas small household appliances being stored has basically come to an end, and orders from new customers are being placed rapidly. 1) With the end of the overseas storage cycle, the company's vacuum cleaner revenue rebounded from 2Q23 on a low year-on-year basis. In 2023, the company's vacuum cleaner revenue was 1,631 billion yuan, +18.0% year over year, of which TTI order revenue was 1,519 billion yuan, +9.1% year over year.

2) The company's 1H23 introduced a new strategic customer, SharkNinja. Since 2Q23, orders have been released rapidly. In 2023, SharkNinja's order revenue was 485 million yuan, of which high-speed hair dryers contributed greatly, driving the company's revenue of small household appliances +117.2% to 822 million yuan in 2023. 3) 1Q24's revenue reached a record high for the same period. We estimate that it was mainly driven by the increase in orders from new customers, while orders from original customers continued to recover.

The auto parts business continued to gain new ground and entered the second year of mass production. 1) In 2023, the company obtained a total of 4 new targets for automobile motors, with a total fixed amount of over 1.4 billion yuan throughout the life cycle. By the end of 2023, the company had obtained a total of 30 fixed targets for automobile motor projects, with a fixed amount of more than 2.3 billion yuan in 2024-2026. 2) In 2023, the company's auto zero business entered its second year of mass production. In 2023, automobile motor sales exceeded 1.2 million units, and auto zero revenue was 202 million yuan, +171.7% over the same period last year. 3) The company's automobile motors increased on a fixed basis and entered mass production one after another. The scale effect was gradually reflected. The gross margin of the auto zero business in 2023 was +8.7ppt to 10.3% year-on-year.

Financial analysis: 1) The company's gross profit margin in 2023 was 19.1%, +1.3ppt year-on-year, mainly due to the high gross margin of new customer orders and the scale effect of the auto zero business. Affected by exchange rate fluctuations, the company's exchange revenue in 2023 decreased by 115 million yuan year on year, and the financial expense ratio was +6.2ppt year on year. The company's net profit margin for 2023 was 11.6%, -3.8ppt year over year. 2) The company's 1Q24 gross profit margin was 17.4%, year-on-year -0.7ppt, net interest rate 10.3%, and year-on-year +2.9ppt. We estimate that this was mainly due to exchange rate fluctuations.

Development trends

1) We believe that the company is expected to expand the scope of cooperation with new customers and look forward to new developments in new products such as electric/garden tools and smart dishwashers. 2) Under the opportunity of domestic substitution, we believe that the company's auto zero business is expected to continue to gain new targets and increase profitability in the process of rolling out existing projects.

Profit forecasting and valuation

Since the volume of new customer orders exceeded our expectations, we raised 2024 net profit 16% to 451 million yuan, and introduced 2025 net profit of 543 million yuan. The current stock price corresponds to 16.6x/13.8x 2024E/2025E price-earnings ratio. Maintaining an outperforming industry rating, taking into account profit forecast adjustments and the downward trend in the industry valuation center, we maintained a target price of 25.86 yuan, corresponding to a price-earnings ratio of 21.4 times/17.7 times 2024E/2025E, with 29% upside compared to the current stock price.

risks

Risk of fluctuations in overseas demand; automotive motor business development falling short of expectations; risk of exchange rate fluctuations.