Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 5.727 billion yuan, an increase of 11.21% over the previous year; realized net profit of 1,581 billion yuan, an increase of 5.07% over the previous year; and realized net profit without return to mother of 1,221 billion yuan, an increase of 0.05% over the previous year.

24Q1 achieved operating income of 1,564 billion yuan, a year-on-year increase of 31.49%; realized net profit of 433 million yuan, an increase of 35.31% over the previous year; realized net profit without deduction of 378 million yuan, an increase of 57.40% over the previous year.

The trend is recovering from quarter to quarter, and high-capacity MLCCs are being released quickly:

Benefiting from the end of downstream inventory removal, recovery in consumer electronics demand, and continued breakthroughs in the company's products, revenue and performance continued to rise in 2023/24Q1. 23Q4/24Q1 achieved revenue of 16.21/1,564 billion yuan (yoy +35.56%, qoq +9.77% /yoy +31.49%, qoq -3.53%), and achieved net profit of 4.39/433 million yuan (yoy +67.52%, qoq +6.80% /yoy +35.31%/yoy +35.31%/ QoQ -1.35%). The decline in gross margin in 2023 was mainly due to changes in product structure. The market recognition of the company's MLCC products increased significantly, and the application field continued to expand. The electronic components and materials business revenue reached 2.196 billion yuan (yoy +50.32%), and the revenue share increased to 38.35% (yoy+9.97pct). The profit level rebounded steadily in 24Q1, with gross margin reaching 40.14% (yoy+0.73pct, qoq+0.18pct), and the sales/management/finance expense ratio decreased by 0.24/2.38/0.06pct, respectively, compared with 2023.

Adhere to innovative research and development with a combination of quantity and quality, and there is broad room for medium- to long-term growth:

The company continued to increase R&D investment. R&D expenses increased 20.71%/20.88% year-on-year in 2023/24Q1, and the number of R&D personnel increased to 2,034 by the end of 23 (yoy +11.94%). According to the company's annual report, 1) MLCC: The company has achieved a technological breakthrough and complete mass production with a media layer thickness of 1 μm, with more than 1,000 layers stacked, and the product covers mainstream specifications of 0201-2220; the company's automotive high-capacity MLCC products have passed vehicle regulation system certification, and the supply specifications and quantities to establish cooperation are gradually increasing; the high-capacity series MLCC production expansion project is expected to reach the scheduled state of use in May 2025. 2) SOFC module/system: The company has now completed the development of a 50kW electric stack module and applied it to the second-generation 50kW system; in October 2023, the company first announced and showcased the newly developed 50kW SOFC cogeneration system. The power density was increased by 43%, and reliability tests were carried out over 2000h. The initial power generation efficiency reached 65%, and the cogeneration efficiency was over 90%. It is currently the SOFC system with the highest stand-alone power and power generation efficiency in China. 3) PKG: Some of the new specifications of high-strength PKG have been verified by customers and supplied in small quantities. 4) Inserts: The company is developing multi-pin MT ferrules for high-speed optical communication, of which 24-pin single-mode low-loss specifications are being verified by customers. 5) Packaging substrates: High thermal conductivity ceramic packaging substrates for inverters have cooperated with leading customers in the industry to achieve stable supply. 6) High-speed optical communication tube case:

The 400G tube case has been verified by the customer and shipped in small batches, and the relevant transceiver module shell is being verified by the customer. 7) Precision ceramic structural parts: The company will continue to develop products such as biomedical-related components, new energy vehicle parts, semiconductor ceramic structural parts, etc., and further expand the downstream application market.

Actively give back dividends to investors, and maintain a high level of dividend ratio:

Since its listing, the company has accumulated cash dividends of about 3,541 billion yuan. Each year, annual cash dividends account for more than 30% of the net profit attributable to common shareholders of listed companies in the consolidated statements for the current year.

In 2023, the company plans to distribute a cash dividend of 2.80 yuan (tax included) to all shareholders for every 10 shares. Based on the total share capital of 1,916 million shares at the end of 2023, it plans to distribute a total of about 537 million yuan, accounting for 33.94% of the net profit due to mother for the whole year. The shareholder dividend return plan recently disclosed by the company shows that in 2024-2028, after reserving the full amount of the statutory provident fund and surplus provident fund, the annual cash dividend distributed by the company to shareholders will not be less than 30% of the distributable profit achieved in that year. On the premise of ensuring full cash dividend distribution, the company can separately increase stock dividend distribution and the provident fund to increase share capital.

Investment advice:

We expect the company's revenue for 2024-2026 to be 7.032 billion yuan, 9.118 billion yuan, and 11.039 billion yuan, respectively, and net profit to mother will be 1.97 billion yuan, 2.55 billion yuan, and 3,077 billion yuan respectively, giving 35 times PE in 2024. The corresponding target price is 35.98 yuan, maintaining a “buy-A” investment rating.

Risk warning: downstream demand falls short of expectations; production expansion falls short of expectations; market competition intensifies; technology research and development falls short of expectations.