Incident: Haoyang Co., Ltd. released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 1,305 million yuan, up 6.72% year on year; net profit to mother was 366 million yuan, up 2.81% year on year; net profit after deducting net income of 350 million yuan, up 2.32% year on year. Among them, 23Q4 achieved operating income of 294 million yuan, a year-on-year increase of 0.23%; net profit to mother of 56 million yuan, an increase of 2.78%; net profit after deduction of 49 million yuan, a year-on-year decrease of 2.29%. 24Q1 achieved operating income of 315 million yuan, -4.55% year on year; net profit to mother of 101 million yuan, up 0.90% year on year; net profit after deducting net income of 97 million yuan, up 0.94% year on year.

The production efficiency of new products put pressure on revenue in the short term. OBM and domestic business increased significantly, and the company's revenue in 24Q1 was under slight pressure, mainly due to 1) bottlenecks in the production efficiency of new products; 2) the share of domestic products with low value increased during the climbing phase of new production capacity; 3) the 23Q1 base was high. As the efficiency of new production capacity and production efficiency of new products continues to rise, the Q2 revenue growth rate is expected to improve. By product, in 2023, the company's stage entertainment lighting equipment/architectural lighting equipment/truss equipment reached 12.09/0.15/028 billion yuan respectively, an increase of 8.03%/-32.33%/-19.52% over the previous year. By sales model, OBM/ODM revenue in 2023 reached 823 million yuan/429 million yuan respectively, an increase of 20.80%/-14.36% year-on-year. The Arden brand grew rapidly, and the share of OBM revenue increased to 66%. By region, domestic and foreign countries achieved 153 million yuan/1,152 billion yuan respectively in 2023, an increase of 111.27%/0.14% year on year, and the domestic market share increased to 12%.

Performance events were upgraded to high-end and large-scale, and the stage lighting equipment market space was vast, and superstars resumed touring and the trend of experiential consumption continued. In '23, the performance market grew rapidly, greatly surpassing pre-epidemic levels. Among them, large-scale concerts are growing at a high rate. According to Pollstar data, the 23 TOP100 music tour achieved box office revenue of 9.2 billion US dollars, an increase of 46% over the previous year. According to BreakingNews, Taylor Swift's current Eras World Tour is scheduled from March 17, 2023 to August 17, 2024. A total of 151 shows are scheduled to be held globally. In 2023, 60 shows have been held (52 in North America + 8 in Latin America), setting a historic tour record of $1 billion in total revenue (accounting for 11% of 23 Top 100 tours), and there are still more than 90 tours in 2024, which is expected to continue to release demand for high-end stage lighting. Meanwhile, stars such as Madonna, the Rolling Stones, and Green Day have already been scheduled to tour in 2024. At the same time, the concert market continues to upgrade to large-scale and high-end, driving the growth in demand for stage lighting. In '23, the global TOP100 music tour grossed +53% to $2.37 million, with an average sales volume of +24% to 181,000 copies per performance, and +23% to $131 per capita. Previously, the 2018-2022 global TOP100 music tour increased at 8% CAGR to US$155 million, the average ticket price per performance increased to US$106 with a CAGR of 3%, and the average sales volume increased to 14,600 copies with a CAGR of 5%.

The domestic market also experienced a rapid recovery after the epidemic. The overall economy of the national performance market reached 74 billion yuan in 2023, an increase of 29% compared with 2019 before the epidemic, reaching a record high.

The core competitive advantage continues to be strengthened. New products and new production capacity accelerate the development of new markets. In 2023, the company maintained a high level of R&D investment. In 2023, 182 new authorized patents were added, including 28 domestic and foreign invention patents. By the end of '23, a number of core patented technologies had been developed and applied, which had improved the product's control accuracy, waterproof performance, heat dissipation efficiency, and color consistency, and launched core new products such as the ultra-high power LED stage light series and the laser stage light series. In terms of production capacity, the first phase of the company's fund-raising project “Performing Arts Lighting Equipment Production Base Phase II Expansion Project” has already been officially put into operation. The company will further accelerate the upward pace of the production capacity of the fund-raising project, which is expected to help the company accelerate the development of the broad domestic and international mid-range and architectural lighting markets.

Profitability increased steadily in 24Q1. The increase in the share of independent brands led to an upward shift in profitability in the profit center. In 2023, the company's gross margin was 49.96%, down 0.22pct year on year; 23Q4 gross margin was 46.64%, down 0.53 pct year on year. The year-on-year decline in gross margin in 23Q4 was mainly due to an increase in the share of domestic sales revenue with low gross margin. 24Q1 gross margin was 52.66%, up 1.01pct year on year. Mainly, 24Q1 domestic sales accounted for a relatively low share, and the share of OBM increased further.

In terms of period expenses, the company's expenses rate for the 23-year period was 15.87%, up 1.12pct; sales/management/R&D/finance expenses were 7.73%/6.78%/4.36%/-2.99%, respectively, +0.90pct/-1.10pct/-0.35pct/+1.66pct, respectively. The cost ratio for the 24Q1 period was 15.24%, down 0.43pct year on year; the sales/management/R&D/finance expenses ratio was 8.78%/6.10%/5.00%/-4.63%, respectively, up year on year

1.62pct/0.87pct/1.56pct/-4.48pct.

Under the combined influence, the company's net interest rate in '23 was 28.31%, down 1.15pct year on year; 23Q4 net interest rate was 19.21%, up 0.54 pct year on year. Net margin for 24Q1 was 32.21%, up 1.93pct year over year.

Investment proposal: Haoyang Co., Ltd. leads the world in technology and is a well-known European and American brand with scarce resources. It binds high-quality ODM customers. The new production capacity is expected to contribute to the increase, and long-term growth can be expected. We expect Haoyang Co., Ltd.'s 2024-2026 operating income to be 16.65, 20.84, and 2,592 billion yuan, up 27.60%, 25.17%, 24.38% year-on-year, and net profit to mother of 4.79, 6.12, and 765 million yuan, up 30.71%, 27.79%, and 25.06%, corresponding to PE valuations of 16.2x, 12.7x, and 10.1x, with a 24-year target price of 24.39xPE, corresponding to a target price of 138.46 yuan, maintaining a “buy-A” investment rating.

Risk warning: Market demand falls short of expectations, the impact of the Red Sea incident exceeds expectations, the increase in market share falls short of expectations, raw material prices fluctuate, business development falls short of expectations, and the risk of major shareholders reducing their holdings.