Core views

2024Q1's revenue fell 3.54%, and the decline was 5 percentage points narrower than 2023Q4; with the advancement of equipment renewal policies, the education sector is expected to support instrument demand. The profit side of the company was clearly under pressure in the first quarter, mainly due to an increase in initial depreciation at the R&D center and subsidiaries, and the cost side is expected to gradually dilute throughout the year. The company announced a new round of equity incentive plans, and the performance growth target for the next 2 years was further clarified. By binding core employees with the company's interests, it will add impetus to long-term development.

occurrences

In the first quarter of 2024, the company achieved revenue of 151 million yuan, -3.54% year on year; net profit to mother was 6.3072 million yuan, -72.75% year over year; net profit after deducting non-return to mother was 6.6938 million yuan, -151.38% year on year.

Brief review

1. 2024Q1 R&D and management expenses increased, and net profit was clearly under phased pressure, and the company's revenue fell 3.54% in the first quarter of 2024, and the decline was 5 percentage points narrower than 2023Q4. At the industry level, the current overall demand in the electrical measuring instrument industry is still sluggish and needs to be built up; with the advancement of equipment renewal policies, the education sector is expected to support instrument demand. At the company level, 2024 is expected to be the first year for the company to release 13 GHz high-end oscilloscopes and the year for continuous 12 bit high-resolution oscilloscopes, and the revenue growth rate is expected to improve quarterly. 2024Q1's net profit declined significantly and net profit losses not attributable to the mother were mainly due to a 41.57% year-on-year increase in the company's R&D expenses, as well as a significant increase in management expenses due to depreciation of the Shanghai subsidiary plant, which has not yet been officially put into use, and depreciation of the Malaysian subsidiary's right to use assets.

2024Q1's comprehensive gross margin increased slightly by 0.58pct to 54.81% over the same period last year. As the peak season arrives, customers increase their procurement of high-end products, and there is room for improvement in the overall gross margin throughout the year. The cost ratio of the 2024Q1 company increased sharply by 16.68 pct to 61.89% year over year, surpassing the gross margin level in stages; the sales expense ratio was +0.54 pct to 16.57% year over year; the management expense ratio was +4.85pct to 14.26% year over year, mainly due to increased depreciation at the beginning of the period; the R&D cost rate was +9.09pct to 28.52% year over year, mainly due to the launch and release of new products by the company. With the launch and release of new products, The R&D cost rate is expected to fall back to the historical average of about 20%; the financial cost ratio was +2.21pct to 2.54% year-on-year. 2024Q1's net margin was -8.48pct year-on-year to 6.31%.

2. Improve quality, increase efficiency and return, and transform and upgrade from a product supplier to a comprehensive solution provider ① Lay out overseas production capacity: The Malaysian production base is expected to be put into use in May 2024, and a production capacity of 80,000 electronic measuring instruments per year will be formed as soon as possible. ② M&A collaboration: Actively promote the integration of enduring electronics after the merger and acquisition, achieve transformation and upgrading from a hardware-based electronic measuring instrument supplier to a comprehensive solution provider, and achieve an in-depth layout in the field of quantum technology. ③ Focus on shareholder returns: In 2023, the company plans to distribute cash dividends totaling RMB 92.5617 million (tax included), accounting for 85.74% of net profit attributable to mother. In addition, the company plans to use 30-50 million yuan of its own capital to repurchase shares for equity incentives.

3. Release a new round of equity incentive plans to bind core employees and company interests, and add impetus to long-term development. The company issued the 2024 restricted stock incentive plan (draft). The number of restricted shares to be awarded to the incentive target is 2.80 million shares, accounting for about 1.5125% of the company's total share capital. The incentive targets include core key employees and other people (80 people) that the board of directors believes need incentives. The performance assessment goals of this restricted stock incentive plan: 1) Target value: 30% year-on-year increase in revenue in 2024 or 2025, or 20% year-on-year increase in net profit to the mother; 2) Trigger value: 2024 and 2025 revenue increase 15% year over year or net profit to mother increased 10% year on year. It is enough to achieve one of these, and the unlock ratio is 80%-100%, depending on the extent of excess completion. The implementation of the equity incentive plan is expected to fully motivate core employees, thereby adding impetus to the company's performance growth.

Investment advice: Considering endogenous growth only, we expect the company to achieve revenue of 810, 9.78, and 1,179 million yuan respectively in 2024-2026, and net profit of 1.31, 1.62, and 203 million yuan, respectively, +21.77%, +23.38%, and +24.96% year-on-year, corresponding to the 2024-2026 dynamic PE of 49.49, 40.11, and 32.10 times, respectively, maintaining the “buy” rating.

Risk analysis

1) High-end product progress falls short of expectations

Since domestic companies started late in the field of general electronic testing and measurement, technology accumulation time is short, and there is still a big gap with foreign dominant companies in terms of product layout and technology accumulation, and the product structure is mainly concentrated in the middle and low end. If the company is unable to launch high-end products as expected or sales of the high-end products already launched fall short of expectations, it will affect the company's core competitiveness, which in turn will adversely affect the company's profitability.

2) Risk of dependency on imports of electronic components

The design and processing level of electronic components directly affect the performance of the company's products. Some high-end electronic components in the company's raw materials, such as IC chips and high-precision resistors, require the use of imported products, and there are few domestic products with equivalent performance that can be replaced. If there are major adverse changes in the international trade environment, or if the production capacity of foreign manufacturers is limited, the company will face the risk of a shortage in the supply of raw materials or fluctuations in procurement prices.

3) Potential risks arising from litigation matters

The electronic measuring instrument industry is a high-tech industry. Products and technology are being iterated rapidly, and there are patent-related lawsuits between competitors in the same industry. If a company loses in a lawsuit, it may face potential risks such as failure of a patent application or reputational risk.