Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 525 million yuan, +13.35%; realized net profit to mother - 126 million yuan, an increase in losses over the previous year; deducted non-net profit - 131 million yuan, increasing year-on-year losses. In 2024, Q1 achieved revenue of 141 million yuan, +56.72% year-on-month, and +0.70% month-on-month; realized net profit of -30 million yuan, increasing year-on-year losses and decreasing month-on-month losses; deducted non-net profit of -34 million yuan, increasing year-on-year losses and decreasing month-on-month losses.

24Q1 revenue increased dramatically, and profit-side losses decreased month-on-month: The company's revenue increased sharply in Q23 and 24, mainly due to a recovery in demand in the domestic smartphone terminal market and an increase in orders from downstream customers, which led to a significant increase in revenue. The increase in the company's net profit loss to mother in '23 was mainly due to the expansion of losses in the MLCC business and semiconductor lead frame business. Among them, the MLCC business is still in the R&D and trial production stages, causing significant increases in costs such as materials, labor, and depreciation during the period. At the same time, the semiconductor lead frame business is in the market development period, and gross margins are low due to low product pricing, insufficient capacity utilization, and a relatively high share of fixed costs. If the impact of new business such as MLCC and semiconductor lead frames is excluded, the company's 24Q1 consumer electronics business turned a loss into a profit, increasing profitability compared to the first quarter of last year. The gross margin for '23 was 18.75%, -3.95pcts year on year; the company's net margin was -26.30%, -10.18pcts year on year. The company's gross margin in Q1 '24 was 22.26%, +11.26pcts year on year, +2.81 pcts month on month; net margin was -23.55%, +12.32pcts year on year, +26.35pcts month on month. In terms of expenses, throughout 2023, the company's sales, management, R&D and financial expenses rates were 4.76%/13.65%/20.28%/5.72%, respectively, with year-on-year changes of -1.05/+3.11/+3.54/+1.19pct, respectively. Among them, R&D expenses increased year-on-year, mainly due to the company's increased R&D investment in new fields such as electronic ceramics.

Benefiting from the recovery in demand and the upgrading of mobile phone optical technology, CMI is expected to accelerate volume: According to IDC data, the 24Q1 smartphone market shipped about 69.26 million units, up 6.5% year on year, continuing the rebound trend at the end of last year, and the market performance was higher than expected. Among them, Huawei and Honor tied for the first place in the domestic market share, and mobile phone shipments increased 110% and 13.2% year-on-year respectively. Benefiting from the continued increase in domestic smartphone brand shipments and the accelerated penetration of OIS optical anti-shake and periscope cameras into low-end phones, the company's CMI is expected to accelerate volume. The company will carry out production expansion plans based on mass production orders in the second half of the year, mainly for CCMI related production line expansion to meet customer needs. In '24, the company will focus on promoting the application of CMI's third-generation and fourth-generation products in high-end flagship phones, while relying on cost advantages to actively expand the market share of CMI first- and second-generation mobile phones. As CMI's third-generation and fourth-generation products are released and yield increases in the future, the company's gross margin will gradually improve and enter the repair channel.

Electronic ceramics are growing rapidly, and ceramic substrates are expected to usher in a period of rapid growth: Electronic ceramics is the company's medium- to long-term strategic business, mainly including MLCC and DPC. 1) MLCC: The MLCC business entered trial production and mass production in November 23. In the next 2 years, the company will focus on investing resources in product development, process optimization, and cost control to enhance the company's competitiveness. In 25-26, along with the increase in the company's MLCC product line and the continuous maturity and stability of production and processes, it is expected that while sales will increase, losses will gradually decrease. 2) Ceramic substrates: In '21, our subsidiary Chizhou Yunzuka invested in the construction of automotive electronic precision components and electronic ceramic substrate projects. In '23, the company successfully developed ceramic substrate products and entered mass production. They are mainly used in high-power LED lighting, UV LEDs, 5G communication micro base station RF devices, sensors, and power electronics power devices. Furthermore, at the end of '23, the DPC laser heat sink device independently developed by the company achieved commercial mass production. The company has developed various types of precast gold tin ceramic heat sink products, including aluminum nitride, silicon carbide and other products, which are mainly used in the fields of lasers, medical aesthetics, military industry, etc. Currently, monthly production capacity is expected to accelerate in the future, and the DPC business will rapidly grow and deliver results over a long period of time.

First coverage, giving a “buy” rating: The company is mainly engaged in R&D, design, manufacturing and sales of precision components in the field of optics and products in the fields of automotive electronics, electronic ceramics, etc. Among them, consumer electronics precision electronic component products are the company's pillar industry. They are mainly used in voice coil motor VCM and camera module CCM in smartphone cameras, and terminals are used in mainstream smartphone brands such as Huawei, Xiaomi, OPPO, VIVO, Honor, and Audio. 1) Consumer electronics business: Industry demand continues to recover, and domestic mobile phone brand market performance is strong, better than expected. According to IDC data, the Chinese smartphone market shipped about 69.26 million units in 24Q1, up 6.5% year on year. Continuing the rebound trend at the end of last year, market shipments grew positive year on year for the second consecutive quarter. Among them, shipments of Honor and Huawei increased 13.2% and 110% year over year.

The company's products mainly meet domestic mainstream mobile phone market applications. We are optimistic that the CMI business will benefit from increased sales of domestic mobile phones such as Huawei and OV Mi, and shipments are expected to continue to grow at a high rate. On the other hand, mobile phone optical technology continues to innovate, and Apple and Huawei are leading periscope lenses to accelerate penetration. The market space for smartphone optical cameras and modules has increased rapidly, and the application of periscope motors and variable aperture has gradually expanded, creating more market space for the application of the company's CMI series products, and the market demand for CMI products in periscope motors and OIS motors has further increased. According to TSR data, global VCM shipments are expected to grow to 2 billion units by 2026. Along with the upgrading of the smartphone optical camera field, especially the gradual expansion of periscope motor applications, there are higher requirements for product precision, space and performance. The company's CMI series products are not only innovative in design and development, but also reduce the manufacturing cost of traditional camera motors, save internal motor design space, and provide a better solution for iterative upgrades in the field of smartphone optics. The company has upgraded from the first generation CMI product to the fourth generation product, the IV-HD CMI. The product integration level has been further improved, and ceramic substrates and driver ICs have been added to the original production process, further improving product technical barriers, effectively saving camera module space, and increasing product value. At the same time, OIS optical image stabilization+periscope cameras are rapidly penetrating into mid-range and low-end phones, spawning an increase in CMI demand. The company's CMI products have gradually declined from high-end mobile phones to mobile phone terminal applications with a stand-alone price of around 1,000 yuan, thus driving the company's shipments of the first and second generation CMI products. In the field of high-end models and flagship models, the company actively promotes the application of CCMI products in periscope and telephoto cameras to meet customers' higher technical and functional requirements for camera motors. For example, the third-generation CCMI products launched by the company were technically upgraded and successfully applied in H Company P series products.

In 2024, the company will also actively promote the application and mass production of fourth-generation CCMI products in the terminal market. In recent years, the company has actively expanded its automotive electronics and electronic ceramics business, and is expected to continue to grow in the consumer electronics business. 2) In terms of automotive electronics, the company's main products are the controller parts of the chassis line control system, including ABS, ESC, ONE-BOX controllers and EPB components. The company has completed the development of intelligent automatic production lines from automatic implantation and molding equipment to automatic coil winding and assembly and inspection. At the same time, the company actively lays out the automotive-grade IGBT market, and is expected to continue to increase IGBT customer supplier system access in 2024, creating new business growth points for the automotive electronics business. 3) Electronic ceramics business: High capacity MLCCs are mainly monopolized by Japanese manufacturers, etc., and domestic replacement demand is huge. Expanding the MLCC business is expected to accelerate the MLCC localization process. In '24, the company's MLCC business focused on R&D, focusing on new product development, process technology improvement, manufacturing cost optimization, quality and stability improvement, etc., to continuously improve the competitiveness of the company's products. In the short term, higher investment may still drag down the company's profits, but in the medium to long term, as the company's yield increases and production capacity is fully prepared, it is expected to provide greater flexibility for the company's performance when MLCC reaches an upward inflection point at the bottom of the cycle, so we give it a “buy” rating. The company's net profit for 2024-2026 is expected to be -60 million yuan, 48 million yuan, and 83 million yuan respectively; EPS is -0.50, 0.40, and 0.69 yuan/share, respectively; and PE in 25-26 is 41X and 24X respectively.

Risk warning: Downstream demand falls short of expectations, market competition increases risk, raw material price fluctuation risk, and downstream customer concentration risk.