Short-term pressure on 23-year results. In '23, the company achieved revenue of 1.26 billion yuan, a year-on-year decline of 21%. The decline in revenue is mainly due to the fact that most of the company's products are aimed at the smartphone and consumer electronics industries, especially in North America. Demand for stand-alone cooling materials for new models in '23 fell compared to the previous generation, and competition intensified, leading to phased pressure on the company's sales revenue and profitability. The company's net profit in '23 was 74 million yuan, down 62% year on year. The large decline was mainly due to gross margin being affected by the decline in unit prices. In '23, the company's gross profit margin was 25.1%, down 3.1 pct year on year. Among them, the gross profit margin for thermal conductive materials was 23.7%, down 3.8 pcts year on year. Furthermore, the company increased its international team and production base, resulting in an increase in the cost side.

The profit side improved significantly in the first quarter, and profitability recovered significantly. 24Q1 achieved revenue of nearly 300 million yuan, a slight decrease of 4.5% over the previous year. We believe it was mainly due to relatively moderate off-season shipments from major North American customers in the first quarter combined with the unit price value of old models falling compared to the past. The company's profit side improved significantly. Q1 net profit to mother was 0.3 billion yuan, an increase of 42% over the previous year. Gross margin increased sharply by 6.8 pct year on year, and increased 3.2 pct to 30.5% month over month, a record high in a single quarter since the second half of '21. We believe it mainly benefited from the company's internal cost and product structure optimization. The company's overseas factory in Thailand has been successfully put into production and operation, successfully completed the Thai factory inspection and certification work for major North American customers, Samsung, Nokia, etc., and successfully mass-produced graphite projects for major Korean customers. Revenue from graphite products is expected to grow further. In terms of other heat transfer materials, the company's high-efficiency cooling modules and core components, heat pipes, and VCs achieved year-on-year growth in 23, and are expected to expand further in 24.

Positioned as a comprehensive solution provider, we can expect two-dimensional growth in product matrices & application fields. In addition to the main graphite products, the company has various product capabilities such as electromagnetic shielding materials, thermal interface materials, heat dissipation modules, adhesives, etc., and is one of the few domestic manufacturers with overall reliability solutions. On the one hand, the company is expected to enrich product categories among major customers. For example, the company continues to define the next-generation product roadmap with customers as the preferred strategic R&D partner for thermal interface materials for important customers. On the other hand, in high-growth tracks such as data centers, autonomous driving, and optical modules, the company is also expected to use existing integrated heat transfer material superposition heating solutions to greatly increase the added value of products and the value of stand-alone machines. Overall, China's relevant high-end electronic functional materials are still mainly dominated by European, American, Japanese and **** manufacturers. The localization rate is low. The company is expected to benefit from the domestic substitution trend, and there is plenty of momentum for long-term growth.

We predict that the company's net profit for 24-26 will be $1.19/1.97/272 million (the original net profit for 24/25 was $3.38/446 million, respectively, mainly based on the 23-year situation, adjusted revenue and gross margin forecasts, and increased expense ratio forecasts). Based on the comparable company's 25-year 28 PE valuation, the corresponding target price would be 18.48 yuan, maintaining the purchase rating.

Risk warning

Smartphone sales fall short of expectations; risk of product price fluctuations; risk of gross margin fluctuations.