Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 2,660 billion yuan, a year-on-year decline of 1.35%, and net profit of 396 million yuan, a year-on-year decrease of 4.44%; in 2024Q1, revenue of 585 million yuan, a year-on-year decline of 19.59%. Downstream demand for speed reducers was weak. The company's share growth showed that the macroeconomic recovery in 2023 fell short of expectations. China's speed reducer industry is still in a downward adjustment period, and market demand continues to decline throughout the year. The sales volume of speed reducers was about 654,500 units, up about 7.64% year on year, higher than the industry's growth rate, showing alpha attributes; however, due to the intense competitive price war, annual revenue fell by about 1.35% year on year. Among them, in the general purpose reducer sector, the market share of modular reducers with high added value increased steadily, and the number of units shipped and sales increased year-on-year; the number of cycloid reducer shipments declined significantly year on year; although the annual number of hard tooth surface reducers and reducers supporting the rubber industry increased slightly, due to the downturn in downstream conditions and increased market competition, product sales prices dropped significantly year-on-year.

Gross margin was pressured by the price war, which is expected to improve profitability as demand recovers. Affected by the price war, the company's gross profit margin was 26.01% in 2023, down 0.73 pcts year on year. Among them, the gross margins of gear reducers, cycloid reducers, and GNord reducers were -1.57/+2.64/1.93pcts respectively; the period cost ratio was 10.14%, down 0.2 pcts year on year; net profit margin was 14.78%, down 0.49 pcts year on year, basically stable. The 24Q1 gross profit margin was 23%, down 4.17 pcts year on year, the net profit margin was 11.02%, down 1.73 pcts year on year, mainly due to the impact of low gross margin orders in the previous period. We believe that as downstream demand picks up, the price of speed reducers is expected to stabilize, and the company's profitability will improve.

The precision transmission field is still waiting to be expanded, and the platform-based layout opens up space for growth. The company continues to promote diversified product layouts and actively explore the field of special speed reducers while maintaining a competitive advantage for general purpose reducers: 1) Geno Transmission: The new plant will be officially put into use, developing new products for medium and large injection molding machines, which have successfully delivered samples to downstream customers; downstream breakthroughs such as HAECO, PV film, pharmaceuticals, environmental protection, and petrochemicals; 2) Engineering planet: marine products have received tens of millions of orders; the photovoltaic field has achieved series development in the wind power field; Samples of variable pitch yaw reducers have been tested by well-known OEMs; European Crane reducers gradually replaced foreign brands; 3) Industrial gearboxes: import substitution continued, sales increased by about 20% year on year, and market share further increased; 4) Precision transmission: Production capacity was further increased after factory relocation, and harmonic reducers for CNC have been developed for CNC in the fields of machine tools, humanoid robots, etc.; in addition, the company quickly entered the precision planetary field through the acquisition of 65% of Modoli Transmission's shares to increase the layout of industrial automation fields such as laser cutting machines, CNC machine tools, and robots/manipulators.

Investment advice

The company is expected to achieve revenue of 3,029 billion yuan/3.496 billion yuan/3,996 billion yuan and net profit to mother of 466 million yuan/545 million yuan/631 million yuan in 2024-26. The price-earnings ratio corresponding to the current stock price is 21X/18X/16X, maintaining a “buy” rating.

Risk warning

Risk of macroeconomic fluctuations, new product releases falling short of expectations, increased industry competition, fluctuations in raw material prices, etc.