Incident: Songlin Technology released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 2,983 billion yuan, a year-on-year decrease of 6.20%; net profit to mother was 352 million yuan, up 34.94% year on year; net profit after deducting non-return to mother was 358 million yuan, an increase of 24.21% year on year (Beijet deducted net profit of 80 million yuan, exceeding promises of 0.16 million yuan, fulfilling 125% of performance promises). Among them, the 2023Q4 company achieved operating income of 790 million yuan, an increase of 13.71% year on year; net profit of 48 million yuan, an increase of 49.73% year on year; net profit after deduction of 68 million yuan, an increase of 125.96% year on year. 2024Q1 achieved operating income of 681 million yuan, an increase of 12.61% year on year; net profit to mother was 111 million yuan, up 154.72% year on year; net profit after deduction was 102 million yuan, up 156.89% year on year.

Kitchen and bathroom health is picking up season by season, and beauty and health are developing rapidly

The company is positioned on the IDM model strategy to build an “IDM category champion incubation platform for health hardware”, continuously integrating R&D innovation and industrial design into products, and continuously increasing R&D investment to maintain the company's leading position in the industry. By product, kitchen and bathroom health products, beauty and health products, Song Lin Family, and others each achieved revenue of 26.15/2.59/0.32/0.77 billion yuan, or -7.46%/+79.19%/-72.89%/-16.05% year-on-year respectively. 1) In terms of kitchen and bathroom, the company's kitchen and bathroom orders have resumed quarterly along with the removal of stocks from overseas markets, easing of inflation, and restoration of demand. Industry demand is expected to benefit from a recovery in demand related to the real estate chain after the US interest rate cut. The company will also continue to generate new products and functions through product systematization, integration, and technological innovation to expand new types of brand customers to achieve growth. 2) In terms of beauty and health, according to Jiuqian data, online sales of beauty devices in China increased 29% year-on-year to 13.1 billion yuan in '23. The company has many patents and has mastered many core technologies. Currently, product revenue mainly comes from beauty showers and beauty devices, and has established cooperative projects with many major customers around the world. In 23 years, the volume of beauty and health care has increased by 79% to 259 million yuan over the same period last year. The company will continue to develop new customers and new projects, and reserve new products such as hair care devices and hair removal devices. It is expected to form a new growth curve in the medium term.

By region, overseas and domestic revenue in 2023 was 1,940/1,043 billion yuan respectively, or -10.26/ +2.42% year-on-year respectively. 1) In the domestic market, the company's share of domestic sales increased slightly to 34% year-on-year. 2) In overseas markets, according to the company's announcement, the company's revenue in the US market basically recovered to the same level in October 23, while the European market company successfully developed new fields and new types of customers, but due to slow recovery in market demand, the company's European market revenue in October '23 was still being repaired.

Divestment of the “Song Lin Family” business and complete the complete acquisition of Beijet

The company previously held 51% of Beijet's subsidiary Bejet, which was mainly engaged in urea-formaldehyde covers and smart toilet foundries. The company hopes to upgrade Beijet from traditional foundry and processing business to mainly operate under the IDM model. By increasing R&D and innovation efforts, improving product competitiveness, developing high-end customers, and seizing the dividend period for smart toilet business development, the company acquired the remaining 49% of Beijet's shares in November 23, which will accelerate the implementation strategy of R&D integration. In addition, the company divested the “Songlin Family” business in 23Q3, mainly because 1) “Songlin Family” is still in the new model exploration and verification stage, and the capital and time costs required are high; 2) the “Songlin Family” and “Health Hardware IDM” businesses have differences in product categories, business operation models, major suppliers, major customer groups, sales channels, production processes, and main equipment. “Songlin Family” has been in a state of loss for a long time. 23Q1-3 lost 76 million yuan. After the divestment, the company's net profit can reduce losses, and at the same time, it can invest more resources in the “Health Hardware IDM” business, further enhancing its core competitiveness.

To build the first overseas production base. The Vietnam project guarantees supply chain security. In October 2023, the company announced plans to build a smart health hardware production base project in Vietnam. The total investment amount of the project is expected to be no more than 50 million US dollars. The main plan is to assemble plastic products. In February 2024, the company increased the registered capital of its Vietnamese subsidiary, which was adjusted from US$10 million to US$16 million. It is expected that supply chain security will be further guaranteed after the gradual completion of the first overseas production base.

The product structure improved and gross margin increased markedly. In terms of divesting the Songlin family's net interest rate and improving profitability, the gross margin for 23 was 35.02%, an increase of 4.24pct over the previous year. Among them, 23Q4 gross margin was 34.89%, up 1.42pct year-on-year, mainly due to optimization of the company's product structure, depreciation of RMB, lower raw material prices, and increased profitability of the kitchen and bathroom health business. The gross margin for 24Q1 was 35.54%, up 2.00pct year on year. We mainly analyzed the positive impact of continuous product structure optimization and RMB depreciation.

In terms of period expenses, the cost rate for the 23-year period was 19.32%, up 1.48pct year on year, and the sales/management/R&D/finance ratio was 3.98%/8.73%/6.82%/-0.21%, respectively, and -1.04/+0.70/+0.78/+1.04pct, respectively. The cost ratio for the 24Q1 period was 18.37%, a year-on-year decrease of 5.29pct. Among them, sales/management/R&D/finance expenses were 2.79%/9.35%/7.05%/-0.82%, respectively, and -2.01/-0.51/-0.40/ -2.37pct, respectively, of which exchange earnings were about 5 million yuan.

Under the combined influence, the company's net interest rate in 2023 was 13.11%, up 4.13pct year-on-year. 23Q4's net profit margin was 7.14%, up 0.99pct year-on-year. 2024Q1's net interest rate was 16.35%, up 7.94 pcts year over year, mainly due to the divestment of the Song Lin family to reduce losses and acquire the remaining shares in Bejet.

Investment suggestions: The company actively promotes product structure optimization and upgrading while maintaining advantages such as original channels and product development, and establishes connections with customers of various beauty and health products at home and abroad. Beauty and health products are expected to become a new performance growth point. We expect Songlin Technology's revenue for 2024-2026 to be 36.53, 44.05, and 5.323 billion yuan, up 22.44%, 20.83% year-on-year; net profit to mother will be 4.92, 5.92, and 714 million yuan, up 39.50%, 20.41%, 20.58% year-on-year, corresponding PE of 15.4x, 12.8x, 10.6x, and a target price of 26.50 yuan, maintaining the buy-A investment rating.

Risk warning: Industry competition increases risk; raw material prices fluctuate greatly; downstream demand falls short of expectations risk.