Event: Hongwei Technology released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 1,505 billion yuan, yoy +62.48%; net profit to mother of 116 million yuan, yoy +47.63%; and a comprehensive gross profit margin of 22.18% for the whole year, an increase of 1.28 pct over the previous year. In 2023, the company's revenue growth rate was impressive in the two core fields of photovoltaics and new energy vehicles. Among them, companies in the photovoltaic sector had annual revenue of 550 million yuan, an increase of 106.2% over the previous year; companies in the field of new energy vehicles had annual revenue of 330 million yuan, an increase of 149.7% over the previous year.

Inadequate capacity utilization put pressure on the 2024Q1 single-quarter results. In the first quarter of 2024, the company achieved operating income of 246 million yuan, yoy -25.59%, qoq -33.27%; net profit to mother of 0.2 billion yuan, yoy -105.56%, gross profit margin of 15.88% in a single quarter, a year-on-year decrease of 3.56 pcts. According to the company announcement, profits declined due to insufficient capacity utilization in the first quarter due to the impact of the industry environment. We believe that the company is currently in a period of rapid expansion of production capacity, and the compounding of downstream seasonal inventory removal may put pressure on the company's short-term performance. In the future, as downstream demand recovers, the company is expected to show a steady upward trend in performance.

Increase investment in R&D and continue to iterate products. In 2023, the company invested 108 million yuan in R&D, an increase of 68.17% over the previous year, and the R&D cost ratio was 7.18%. 2024Q1 invested 26 million yuan in R&D, an increase of 16.45% over the previous year, and the R&D expenditure ratio was 10.47%. Continued investment in R&D led to rapid product iteration. In the chip field in 2023, the company successfully developed automotive-grade 750V M7i IGBT chips and supporting free-flowing FRD chips, and the 12-inch 1200V/1700V chips for industrial control and photovoltaic applications have all been developed and verified; in the module field, the company successfully developed 400A/650V three-level custom modules for photovoltaics, and the company's 400-800A/750V double-sided cooling modules used in new energy vehicles entered the mass production stage. The development of a customized three-level SiC hybrid module for UPS Systems has been completed.

Large orders are supported, and high-quality customers are accumulated in core areas. After years of accumulation, the company has accumulated a large number of high-quality customers in industrial control, photovoltaics, electric vehicles, charging piles, etc., such as industrial control fields: Huichuan Technology, Delta Group, Aviten, Eaton, etc.; photovoltaic fields: A customer, Sunshine Power, Aisway, Gurivat, etc.; electric vehicles: BYD, Huichuan, Zhendrive Technology, etc.; charging pile fields: Yingfeiyuan, Premium Green Energy, Telco, etc. On the evening of August 21, 2023, the company issued an announcement disclosing the signing of a major contract. According to the company's announcement, Hongwei Technology will provide customer A with no more than 200,000 module products per month from September 2023 to June 2026. The specific supply will be adjusted dynamically on an annual basis based on actual production capacity in September 2023, July 2024, and July 2025.

Profit forecast and investment suggestions: We expect Hongwei Technology 2024E/2025E/2026E to achieve operating income of 17.0/20.5/2.50 billion yuan, yoy 13.0%/20.6%/22.0%; net profit to mother of 1.5/2.0/260 million yuan, yoy 29.6%/35.6%/26.4%; corresponding to the current PE valuation of 26.5/19.5/15.5x, maintaining a “highly recommended” rating.

Risk warning: Downstream demand falls short of expectations, capacity expansion falls short of expectations, and market competition increases risk.