The 2023 results fell short of our expectations. The 1Q24 results were in line with our expectations. The company announced its 2023 and 1Q24 results. Revenue reached 38.6/760 million yuan, down 11.2%/12.3% respectively, and net profit to mother reached 405/60 million yuan, down 35%/30.6% respectively. The 23-year results were lower than our expectations, mainly due to pressure on in-hand orders caused by downstream customers leaving warehouses and insufficient terminal demand. On a quarterly basis, 1Q/2Q/3Q/4Q23 revenue was -32.5%/-2.3%/+3.2%/-7.8%, respectively, and net profit to mother was -48.4%/-34.5%/-32.5%/-25.5%, respectively.

The company plans to pay a mid-year dividend if profit is achieved in mid-24 and the cumulative undistributed profit is positive. According to the shareholder dividend return plan for the next three years (2021-2024) issued by the company, the cash dividend will not be less than 20% of the current year's distributable profit when the conditions are met, and the cumulative amount of cash dividends for any three consecutive years will not be less than 60% of the distributed profit for those three years, increasing shareholder returns.

Development trends

1. The Q1 engraving machine and Ebike are expected to achieve rapid growth, and the health environment business may be under relative pressure. Looking at Q1 revenue by product, we believe: 1) Innovative consumer electronics: With channel inventory removal and terminal sales recovery, the willingness of Circuit engraver and Ebike customers to place orders gradually picked up. Under the influence of a low base during the same period, Q1 revenue may grow rapidly. IQOS shipments are still in transition to core modules and complete machines, and short-term orders are relatively weak; 2) Intelligent control components: Logitech's revenue is expected to grow steadily when terminal demand stabilizes, and game equipment development or drive subsequent growth; 3) Automotive electronics: the company cooperates with leading customers such as Huawei and Chery Stable, electronic Products such as anti-glare rearview mirrors and control modules are expected to maintain rapid growth, and the development of categories such as anti-slip rails is expected to contribute to revenue growth; 4) The health and environment business is under year-on-year or relative pressure.

2. Under the revenue structure adjustment, Q1 gross margin is under pressure in the short term, and attention is being paid to subsequent improvements in profitability. The gross margin of the 2023/1Q24 company achieved 30.7%/27.6%, respectively, and +0.3pp/-2.3ppt year-on-year, respectively, mainly due to revenue structure. On the cost side, the 1Q24 sales/management/R&D/finance expense ratios were +0.1/+0.4/+0.6/-3.1 ppt, respectively. The change in financial expenses was mainly due to the depreciation of the RMB against the US dollar, which brought exchange gains. Under the combined influence, the 2023/1Q24 net profit margin reached 11.7%/7.3%, down 4.3/1.9ppt. We expect that with the recovery of innovative consumer electronics orders and the successful development of new businesses, and the efficiency of domestic and overseas factory operations, the company's profitability is expected to improve in the future.

3. Focus on the 24-year order repair trend for new tobacco and other categories, and automotive electronics are expected to continue to grow rapidly. We expect that as inventory from overseas channels falls and demand progresses steadily, the engraving machine and Ebike business is expected to continue to improve; among the new types of tobacco, the company will continue to deepen cooperation with downstream customers, and revenue and profit are expected to improve; the supply of automotive electronics is booming, and the company is expected to continue to grow rapidly by relying on R&D drive and deep bonding with core customers; and new businesses such as pets and medical care are also expected to be successfully developed.

Profit forecasting and valuation

Considering that orders in some categories of the company are still under pressure, the 24-year profit forecast was lowered by 28% to 550 million yuan. For the first time, a 25-year net profit forecast of 660 million yuan was introduced. The current stock price corresponds to 21/17 times P/E for 24/25. Based on the downstream inventory consolidation driving the subsequent upward trend of in-hand orders, the industry rating was maintained, and the target price was lowered by 11% to 18.6 yuan, which corresponds to 26/22 times P/E in 24/25, with 26% upward space.

risks

Major customer orders are at risk of loss, exchange rates fluctuate greatly, and new product development falls short of expectations.