Introduction to this report:

The share of high-margin lithium battery business revenue increased to improve the company's 2023 performance. The pace of order confirmation fell short of expectations and the 2024Q2/3 revenue will be confirmed centrally.

Key points of investment:

Maintaining the “Overweight” rating, the target price was lowered to $54.18. The company's lithium battery laser processing business grew rapidly and achieved net profit of 86 million yuan (YoY +58.2%) after deduction in 2023, and the performance was in line with expectations. Considering that the increase in perovskite production capacity fell short of expectations and equipment demand, EPS was lowered to 1.5 (-1.08) /1.98 (-1.57) yuan in 2024, and EPS was added by 2.57 yuan in 2026; the company expanded several leading lithium battery customers and continued to receive orders. At the same time, photoelectric testing orders will gradually confirm revenue in 2024, giving the company 36xPE, which is higher than the industry average valuation (33xPE). The target price was lowered to 54.18 yuan to maintain the “gain” rating.

The slow pace of revenue recognition dragged down 2024Q1 results, and Q2/3 will focus on releasing results. Since most of the laser processing equipment and MOPA lasers are customized products, the average revenue recognition cycle in the industry is 9-12 months. The company quickly obtained orders starting in 2023Q3. 2024Q1 is the low revenue recognition point, net profit not attributable to mother of 25 million yuan (YoY -8.01%), and revenue will be confirmed centrally starting 2024Q2/Q3. We believe the company's performance will continue to grow.

The volume of high-end lasers used in lithium battery processing improves gross margin performance after adjusting the revenue structure. The company mainly provides products such as laser welding equipment and extreme ear welding MOPA lasers to leading customers in the lithium battery industry. We estimate that lithium battery business revenue increased by more than 50% year on year in 2023; the high gross margin of MOPA lasers hedged the impact of declining gross margin of passive components and other equipment, driving the gross margin to 41.11% (YoY+5.48pct).

The iteration of AR products releases demand for equipment updates, and customer production line transfers drive domestic substitution, and the company is expected to fully benefit. Customer A is expected to launch a low-cost AR product in 2025, and demand for equipment will be released early; at the same time, customer A will move the optical module production line to China, and the company will continue to win orders based on long-term partnerships and cost advantages.

Risk warning: Technology iteration affects product sales; increased competition puts pressure on gross margin.