Incidents. On April 13, the company released the 2023 Annual Report and the 2024 First Quarter Report. For the full year of 2023, the company achieved operating income of 479 million yuan, +42.48% year on year; realized net profit of 118 million yuan, +149.41% year over year. 2024Q1's total revenue was 125 million yuan, +21.29% year over year; net profit to mother was 27 million yuan, +81.14% year over year.

The company's performance has increased significantly and profitability has improved. In 2023, the company's orderly planning, scientific production schedule, and net profit to mother grew rapidly, mainly due to the gradual normalization of delivery, installation, commissioning and inspection of related equipment. The gross sales margin was 34.30%, +1.01 pct year on year, and the net sales margin improved significantly, to 25.62%, +9.34 pct year on year. By product, the total revenue of fully automatic CNC roller grinders was 404 million yuan, or +46.31%, gross margin was 34.12%; maintenance and modification business revenue was 35 million yuan, +21.39% year on year, gross margin 33.51%; spare parts product revenue was 39 million yuan, +33.51% year on year, gross margin 35.49%. In terms of fee control, the company's sales, management, and financial expenses in 2023 were 0.20, 0.27, and -0.1 billion yuan, respectively. The sales, management and financial expenses ratios were 4.09%, 5.60%, and -2.18%, respectively, with year-on-year changes of -0.98, -1.22, and +5.07pct.

The company's roller grinder products are comparable to world-class standards and lay out the robot parts industry chain. As a leading enterprise engaged in R&D and production of high-end precision grinding equipment, the company's core products are fully automatic precision CNC roller grinders, and the performance indicators of the products have reached world-class standards. Having been deeply involved in the industry for nearly 20 years, we have mastered the core technology of the entire “key functional components - complete machine technology - technical service” industry chain in the field of CNC roller grinders. In particular, it has established a leading position in global technology in the field of high-speed and high-precision grinding, breaking the monopoly of foreign brands on high-end roller grinding equipment in China. The precision thread grinder developed by the company has the ability to grind screw specimens with high precision and is based on world-class products; CNC linear guide rail grinder products can accurately and efficiently perform automatic grinding and error compensation for linear guides. The submicron high-end composite grinding series products are high-precision, multi-functional, and composite turret CNC grinding equipment that the company has focused on launching in recent years, and will provide the company with performance growth in the future. As an important component of robots, screw guides are an important component, and sufficient demand will drive the development of the company's grinding machine products.

The company insists on independent research and development, and the CNC system is gradually being replaced by domestic production. According to data from the China Machine Tool Industry Association, the CNC rate of metal cutting machine tools in China is growing rapidly, to 46.3% in 2022. According to the requirements of the “Made in China 2025” strategic program, it is expected that the numerical control rate of key processes in China will increase to 64% in 2025, giving China's CNC machine tool market broad development space. The Huachen HCK2000 intelligent grinding CNC system independently developed by the company has been tested by customers, and the system's overall improvement in grinding accuracy and efficiency of machine tool products has been recognized by customers. The installation rate of intelligent grinding CNC systems in the company's equipment orders in 2023 reached 35%, which is conducive to breaking the monopoly situation of foreign products and achieving domestic replacement.

Implement market strategies and continuously expand downstream application scenarios. The company actively implements the market strategy of “increasing market share and brand influence”, and actively promotes product technology upgrades and improvements according to customer needs and application scenarios, so that the company's products can enter more fields. In 2023, the company successfully broke through the application field of high-standard electrical steel, providing key core grinding equipment for the new high-end metal plate and foil industry in China; at the same time, it also provided customers in the high-end paper industry with high-precision processing solutions integrating grinding, milling and polishing functions.

Investment advice. The company closely follows the national strategic development direction, adheres to innovation drive, and continues to deepen the breadth and depth of application of CNC machine tools. The future market space is broad, and for the first time, coverage is given a “gain” rating. We expect 2024-2026 net profit to be 1.41, 175, and 206 million yuan, EPS 0.56, 0.69, 0.82 yuan, and PE 39.8, 32.0, and 27.3 times, respectively.

Risk warning: Market competition increases risk; risk of falling product prices and gross margin; risk of recovering accounts receivable; risk of loss of technical personnel.