Key points of investment

The company released its 2023 annual report and 2024 quarterly report

23A achieved revenue of $3,860 million (-11.16% YoY), net profit attributable to mother of $451 million (YoY -35.02%), and net profit of $387 million (YoY).

23Q4 achieved revenue of 100 million yuan (-7.79% YoY), net profit attributable to mother of 117 million yuan (YoY -25.51%), and net profit not attributable to mother of 103 million yuan (-9.72% YoY).

24Q1 achieved revenue of 764 million yuan (-12.30% YoY), net profit of 56 million yuan (YoY -30.63%), net profit of non-return to mother of 43 million yuan (+2.19% YoY), and a positive net profit growth rate after deducting non-attributable net profit.

Market beta: Long-term growth of new tobacco, low penetration of household engravers 1) Intelligent controllers: According to Frost & Sullivan (Frost & Sullivan) data, the global intelligent controller industry had a compound annual growth rate of 5.66% in 2015-2022. The global smart controller industry market reached 1.81 trillion US dollars in 2022, and is expected to reach about 2 trillion US dollars in 2024.

2) Household engraving machine: According to data disclosed in the 2023 annual report of household engraving machine customers, as of the end of 2023, it had 8.9 million registered users, an increase of 13% over the previous year; 2.77 million paid users, an increase of more than 6%; and the proportion of paid users reached 31.12%. By the end of 2023, the global market penetration rate of household engraving machine series products was only 7%.

3) New tobacco: According to Euromonitor International's forecast, the global new tobacco market is expected to reach US$82.10 billion in 2023, up 12.11% year on year. Among them, the global market size of heated tobacco products is expected to grow 18.3% year on year to US$38.30 billion.

4) Automotive electronics: According to the Association of Automobile Manufacturers, China's automotive electronics market reached 978.3 billion yuan in 2022, +10% year-on-year, and is expected to grow to 1097.3 billion yuan in 2023.

Product side: Intelligent control components are growing well. The company has continued to consolidate and upgrade the UDM business for 23 years. It has achieved new breakthroughs in the fields of e-cigarettes, industrial control, pet machines, etc., and has also begun to bear fruit at home and abroad in the fields of brain waves and intelligent healthcare. The revenue for each product of Company 23A is as follows:

1) Intelligent control components achieved revenue of 1,331 billion yuan, surpassing innovative consumer electronics products to become the company's largest business; 23H2 revenue was 704 million yuan, +30.57% year-on-year, and the boom was excellent.

2) Innovative consumer electronics products achieved revenue of 1,155 billion yuan, a year-on-year decline of -48.37%; 23H2 revenue was 639 million yuan, or -35.10% year-on-year, and the decline narrowed. Mainly due to the weakening of terminal demand and high inventory levels in the past two years, the performance of household engraving machine customers has declined. According to data disclosed in the 2023 Annual Report of Household Engraving Machine Customers, both the customer's own and channel inventory returned to a healthy level in 2023.

3) Automotive electronics achieved revenue of 514 million yuan, +42.82% year-on-year, the fastest growth rate; 23H2 revenue was 295 million yuan, +41.74% year-on-year. Keep abreast of the global automotive intelligence development trend, consolidate the leading position of electronic anti-glare products in the domestic industry, and actively build various popular products such as sunroof controllers and seat controllers.

4) Healthy environment products achieved revenue of 378 million yuan, +36.77% year over year; 23H2 revenue of 118 million yuan, -0.50% year over year. Looking forward to 24, with key projects such as high-end activated water, bubble water, and overseas commercial water machines stored in the early stages to be mass-produced in 2024, it will promote the rapid development of the water health sector business.

5) Other products achieved revenue of 369 million yuan, +3.50% year-on-year; 23H2 revenue was 214 million yuan, +25.51% year-on-year, and H2 improved.

E-cigarette: Deeply bound to PMI and supply chain extension. With years of deep cooperation with customer PMI, the company was upgraded from a second-grade plastic parts supplier to a first-level supplier for complete machines in '23, and the core heating components also became an important supplier. We judged that the shipping value of a single set of cigarette sets had increased significantly, successfully achieved mass production of e-cigarette core components and complete machines in '23, and further built a “parts+components+complete machine” business system. On April 23, Fimo International announced 24Q1 results. The 24Q1 HtUS cigarette ejector volume was 33.1 billion units (+21% year over year), the market share in Europe exceeded 10.2% for the first time (9.7% in 23Q4), and reached 29.3% in the Japanese market (27.5% in 23Q4). The momentum is good, and the company is expected to benefit as its core supplier.

Financial indicators: The gross margin is relatively stable, and the exchange rate is increasing 1) Gross profit margin: 23A/24Q1 gross margin was 30.70%/27.58%, +0.26pct/-2.3 pct, respectively.

2) Expense ratio: The cost rate for the 23A period was 15.73% (+3.58% year over year), with sales/management and R&D/finance expenses ratios of 2.27%/14.10%/-0.64% (+0.31pct/+1pct/ +2.28pct), and the financial expense ratio increased a lot, mainly due to a decrease in exchange earnings (140 million in 22 and 0.3 billion in 23).

3) Operating cash flow: 23A net operating cash flow was 689 million yuan (-43% YoY).

Profit forecasting and valuation

In the short term, the impact of engraving machine removal is gradually weakening. The new customers and new businesses developed by the company are gradually forming a diversified product matrix. They are optimistic about the volume of multiple businesses such as e-cigarettes, automotive electronics, and health and environmental products, and performance is expected to continue to improve month-on-month. We expect the company to achieve revenue of 48.89/58.11/ 6.867 billion yuan in 24-26, +26.65%/+18.85%/+18.18%, net profit to mother of 6.27/7.62/923 billion yuan, +39.14%/+21.21% YoY. The PE corresponding to the current stock price is 17.82/14.66/12.10X, maintaining a “buy” rating.

Risk warning

Demand for terminals is weak, new product expansion falls short of expectations, new customer business expansion falls short of expectations, and industry competition intensifies