incident. The company released its 2023 annual report and 2024 quarterly report on April 29. In 2023, the company achieved operating income of 15.567 billion yuan, +3.79% year on year; net profit to mother of 530 million yuan, or -33.73% year on year; deducted non-net profit of 477 million yuan, or -35.77% year on year. 2024Q1, the company's total revenue was 3.741 billion yuan, -2.46% year on year; net profit to mother was 223 million yuan, -13.60% year over year.

The company's operating income performance is stable, and profits are affected by the impairment of subsidiaries. The company's operating indicators generally maintained a steady trend in 2023. Against the backdrop of weak domestic downstream capital expenditure requirements, the operating income of the motor and control business remained stable, thanks to the effects of integration of overseas subsidiaries. By industry, industrial motors and drives achieved revenue of 9.645 billion yuan, +10.02%, gross margin of 29.58%; household motors and controls revenue of 3.111 billion yuan, -3.99% YoY, gross margin of 16.59%; and in terms of electric transportation, revenue of 972 million yuan, +0.33% YoY, gross margin of 16.22%.

The company's overall profitability declined slightly. Gross sales margin and net margin were 25.16% and 3.55% respectively in 2023, with year-on-year changes of +1.45pct and -2.04pct. This is mainly due to the company's long-term equity investment impairment of 211 million yuan and payment performance compensation of 186 million yuan to Hongxiang shares, totaling 397 million yuan. Excluding the influence of Hongxiang shares, the company's net profit to mother was 927 million yuan, an increase over the previous year.

The cost side is basically stable. According to the company's 2023 financial data, sales, management and financial expenses for the year were 759 million yuan, 1,312 million yuan, and 214 million yuan, respectively, with year-on-year changes of +11.18%, +21.20%, and +3.37%; sales, management and financial expenses ratios were 4.87%, 8.43%, and 1.38%, respectively, with year-on-year changes of +0.32, +1.21, and -0.01pct.

Consolidate the motor business foundation, upgrade large-scale equipment, or become a new starting point for motor market expansion. As a leading enterprise in the motor industry, the company has gradually gained global leadership in the fields of high-voltage drive solutions, drive motors for new energy vehicles, high-end and ultra-high-end household motors, and vibration motors. In 2023, due to the boom in downstream mining, oil and gas industries, industrial motor revenue continued to grow. Among them, North America and Europe are the world's most important power tool demand markets, driving the company's overseas market expansion; in March 2024, the State Council issued the “Action Plan to Promote Large-scale Equipment Renewal and Consumer Goods Trade-In”. Equipment updates drive demand growth, and the industrial motor market has considerable potential for future development. In terms of household motors, China's electrical appliance industry is developing well in 2023. Production of air conditioners, washing machines and other small household appliances will expand to varying degrees. In the future, the company's household motors are expected to continue to improve depending on the development of the downstream application market.

The energy storage business continues to expand and has received multiple overseas orders. In addition to the motor business, the company's subsidiary Wolong Energy Storage continues to develop in the field of new energy and continues to win overseas orders. As of 2024Q1, the company's next-generation industrial and commercial liquid-cooled energy storage systems have received batch orders in Mexico. The European side has also established cooperation with customers in the Netherlands, Germany, Austria and other countries, and won orders from the Netherlands.

Closely following the national low-altitude economic development strategy, the company is making steady progress in the field of electric aviation. On December 13, 2023, the Central Economic Work Conference proposed to build a number of strategic emerging industries, including a low-altitude economy. The “Implementation Plan for Innovative Application of General Aviation Equipment (2024-2030)” proposes that by 2030, general aviation equipment will be fully integrated into all fields of people's production and life. The company's Wolong Electric Aviation R&D Center progressed steadily in 2023, with in-depth cooperation with the Civil Aviation Administration's Academy of Aviation Sciences. The 17KW electric power system, 30KW channel electric power system, and 70KW high-power aeronautical electric power system developed by the company have all successfully completed the inspection. On December 29, the company was successfully selected as the only electric power system company in the “2023 Top 20 Leading Companies in China's Low Altitude Economy”.

Investment advice. As a leading enterprise in the motor industry, the company is vigorously promoting the “three growth curves” in an integrated and integrated development strategy, steadily developing the motor business, rapidly advancing progress in the field of new energy, and vigorously developing the “motor+inverter+host computer+sensor+N” system solution business. The future market space is broad, and for the first time, it covers a “gain” rating. We expect 2024-2026 net profit to be RMB 1,102, 12.63, and RMB 1,542, respectively, EPS of 0.84, 0.96, and 1.18 yuan, and PE of 17.3, 15.1, and 12.4 times.

Risk warning: macroeconomic risk; market competition risk; raw material price fluctuation risk; exchange rate change and international trade environment risk; human resources risk.