The 2023 results were in line with our expectations, and the 1Q24 results exceeded our expectations. The company announced 2023 results: revenue of 3.129 billion yuan, an increase of 5.37% over the previous year. Net profit attributable to mother was 356 million yuan, down 19.64% year on year; after deducting non-net profit of 348 million yuan, an increase of 19.7% year on year.

The company announced the issuance of a cash dividend of 0.358 yuan/share (tax included). The 2023 results were in line with our expectations.

The company announced 1Q24 results: revenue of 1.04 billion yuan, up 69% year on year; net profit to mother 162 million yuan, up 244% year on year; deducted non-net profit of 151 million yuan (1Q23 minus non-net profit of 42.8 million yuan). The 1Q24 performance exceeded our expectations, mainly due to a sharp year-on-year increase in consumer electronics and automotive electronics shipments and a good year-on-year improvement in shipments by subsidiary Henghe Dingfu.

Development trends

Revenue was basically flat in 2023, and the automotive connector business grew rapidly. Revenue from RF connectors and cable components/electromagnetic compatibility/soft boards/automotive connectors decreased by 8.48%/decreased by 1.04%/decreased by 23.72%/increased 60.06% year-on-year respectively. Among them, orders from mobile phone terminal customers declined markedly in the first half of 2023, and order volume rebounded in the second half of the year. Automotive connector shipments increased 48.66% year-on-year, mainly due to the expansion of the customer base of leading automakers in the domestic automotive industry and leading overseas Tier 1 companies, as well as the continued expansion of overall production capacity for automotive high-frequency and high-speed connectors and components.

Profitability restoration, high R&D investment and long-term layout. In 2023, gross margin increased by 0.68ppt to 32.4% year-on-year, and the gross margin of RF connectors and cable components/electromagnetic compatibility parts/soft boards/automotive connectors increased by 1.37ppt, down 0.49pp/ down 11.26ppt, respectively. Among them, the gross margin of soft boards declined significantly. The main factor was the loss of performance of the company Henghe Dingfu 1H23. The R&D expenditure rate increased by 0.55ppt year-on-year in 2023. We are optimistic that the company will continue to invest heavily in R&D to deploy AI, 5G and automotive electronics.

1Q24's performance is also growing rapidly, and we are optimistic about the growth potential of the consumer electronics and automotive businesses. 1Q24 revenue increased 68.77% year over year. We judge that the main reason is the increase in demand from automotive electronics and consumer electronics customers such as Xiaomi and Audio. Net profit from 1Q24 increased 244.43% year on year, and gross margin/net margin increased by 3.52 ppt and 7.93ppt, respectively. We judge that the profitability of the automotive electronics business increased rapidly due to scale effects and cost control. In 2023, the company entered the supply chain of major domestic automobile manufacturers such as Geely, Great Wall, BYD, Changan, Chery, and Ideal. We are optimistic that the automotive electronics business will continue to grow at a high rate and that the recovery in consumer demand will drive steady growth in the consumer electronics business.

Profit forecasting and valuation

Considering the high growth in the automotive electronics business, the 2024 net profit forecast was raised by 15.5% to 601 million yuan, and a new net profit forecast of 803 million yuan was introduced. The current stock price corresponds to 29.5/22.1 times P/E for 2024/2025. Maintaining an outperforming industry rating, taking into account profit forecast adjustments and a downward shift in the industry valuation center, we raised our target price by 7.0% to 46.0 yuan, corresponding to 32.3/24.2 times P/E in 2024/2025, with 9.6% upside compared to the current stock price.

risks

Demand for automotive connectors is low, new business expansion such as industrial control falls short of expectations, and demand for consumer electronics is sluggish.