Results for 2023 and 1Q24 fell short of our expectations

The company announced its 2023 and 1Q24 results: 2023 revenue of 1,116 million yuan, up 18.24% year on year, net profit to mother of 53.555 million yuan, down 40.7% year on year, about 28.79 million yuan after year, down 63.81% year on year; of these, 4Q23 achieved operating income of 230 million yuan, down 4.6% year on year, net profit of about -9.58 million yuan, down 10.13 million yuan year on year. During the 1Q24 period, the company achieved revenue of 205 million yuan, a year-on-year decrease of 25.5%. Net profit to mother was about -15.01 million yuan, a year-on-year decrease of 36.5 million yuan. Net profit after deducting non-return to mother was about -14.89 million yuan, a year-on-year decrease of 37.13 million yuan. The overall profit fell short of our expectations, mainly due to a sharp increase in the company's investment in R&D and sales expenses.

Development trends

Affected by the new energy business, the overall industrial control business growth rate has slowed, the machine tool business has grown rapidly, and the position of servo in the domestic secondary market is stable. In 2023, the company's industrial automation business revenue was about 1,025 billion yuan, up 12% year on year. According to MIR data, the servo revenue in 2023 was about 9.3 billion yuan, 22.6% year-on-year, with a market share of about 4.35%, ranking second in China. The revenue scale of the company's machine tool business in 2023 was about 83 million yuan, an increase of 232.6% over the previous year.

Forwardly lay out incremental fields such as new energy and precision machinery, and further improve the layout of integrated products such as “opto-mechatronic transmission”. The company added new projects such as inverters, photovoltaic energy storage, precision rail screws, industrial motors, etc., so the cost investment increased at the same time. In 2023, the company's R&D expenditure rate was about 13.6%, an increase of 2.5 ppt over the previous year. The company's R&D expenses rate during the 1Q24 period was about 20.4%, an increase of 8.8 ppt over the previous year.

The overall gross margin stabilized, and the company's net profit margin was under pressure due to the expansion of expense ratios. As industry competition intensified, the company's gross margin stabilized by reducing costs and increasing efficiency. The gross margin in 2023 was about 29.45%, down 1.0ppt year on year. During the 1Q24 period, the company's gross margin was about 29.65%, up 0.7 ppt year on year.

In 2023, the company's management/sales/R&D expenses rate was about 3.5%/9.4%/13.6%, respectively, up 0.4/1.0/2.5ppt year on year, 1Q24 increased 3.1/5.0/8.8 ppt year on year, and the cost investment was further expanded.

Profit forecasting and valuation

The company continued to lay out new businesses such as rail screws and optical storage, and the R&D investment increased significantly during the 1Q24 period to 20.4%, an increase of 8.8 ppt over the previous year. Furthermore, as the company continued to promote solution investment in various industry segments, the company's sales expenses rate also increased by 5.0 ppt to 12.4% year on year, and the company's net profit during the 1Q24 period was about -15.01 million yuan. Furthermore, considering the impact of the weakening of downstream capital expenditure on new energy sources, we lowered our 2024 net profit by 90 million yuan to 68 million yuan, and also introduced a net profit forecast of 81 million yuan for 2025. The current stock price corresponds to the 2024/25 price-earnings ratio of 57.9x/48.6x. Maintaining an outperforming industry rating, but due to lower industry valuations and the company's profit falling short of expectations, we lowered our target price by 40% to 27 yuan, corresponding to the 2024/25 price-earnings ratio of 59.9/50.3x. Compared with the current stock price, there is still room for 3.6% increase.

risks

Downstream demand fell short of expectations, industry competition intensified, gross margin fluctuated, and expenditure exceeded expectations.