Core views

In the field of communications, the company has achieved coverage of many mainstream communication equipment manufacturers at home and abroad, including Huawei. In the field of defense, the company is a designated supplier of defense connectors for national space projects; in the industrial sector, the company focuses on developing automotive high-voltage connectors and wiring harnesses, charging interface connectors, BDU/PDU charging and distribution system assemblies and control modules, and is developing in-depth cooperation with manufacturers such as BYD and Wuling; the future of the communications sector will drive the company's performance growth with the release of AI computing power demand, the recovery of traditional industry demand, and the improvement of the macro environment. The company is expected to rebound in performance.

occurrences

Throughout 2023, the company achieved revenue of 904 million yuan, a year-on-year decrease of 8.17%, and realized net profit of 72 million yuan to mother, a year-on-year decrease of 26.74%. The first quarter of 2024 achieved revenue of 226 million yuan, +26.48% year on year, and net profit to mother of 10 million yuan, -11.20% year over year.

Brief review

1. Short-term performance is under pressure, and growth is expected to resume in the future.

Throughout 2023, the company achieved revenue of 904 million yuan, a year-on-year decrease of 8.17%, realized net profit of 72 million yuan, a year-on-year decrease of 26.74%, and realized net profit of 0.26 million yuan after deduction, a year-on-year decrease of 63.21%. 23Q4 revenue was 285 million yuan, +2.67% year over year, net profit to mother was 0.3 million yuan, +45.43% year over year, net profit without return to mother was 0.09 million yuan, or -50.30% year over year. The year-on-year decline in net profit after deducting net profit from non-return to mother was mainly due to the company receiving government subsidies of about 53 million yuan in 2023. By business, connector revenue was -10.98% YoY, System Interconnect Product Revenue +0.08% YoY, and Component Revenue -14.75% YoY. The decline in revenue in 2023 was mainly due to a decline in defense and communications services. At the same time, according to business development needs, the company increased investment in human resources, so net profit declined year-on-year.

24Q1 achieved revenue of 225 million yuan, +26.48% year over year, net profit to mother of 10 million yuan, -11.20% year over year, and net profit to mother after deduction of 101 million yuan, -78.59% year on year.

The company continues to increase R&D investment and production capacity expansion costs are high in the short term. Currently, downstream demand is released, and future performance is expected to resume growth.

Throughout 2023, the company's gross margin was 27.44% (-1.45pcts), net margin was 7.44% (-1.37pcts), connector gross profit margin 27.12% (-1.94pcts), system connectivity gross margin 31.89% (-6.61pcts), and component gross margin 25.08% (+0.08cpt). The cost rate for the period was 27.11% (+3.77pcts), of which the sales rate was 4% (-0.36pcts) and the management rate was 13.06% (+3.11 pcts), mainly due to the increase in the number of managers and employee remuneration of the company invested in holding subsidiaries. The R&D rate was 10.43% (+2.01 pcts), and the finance rate was -0.39% (-1 pcts), mainly due to the increase in interest income on deposits raised.

2. Defense: The company is one of the main suppliers of domestic defense connectors, and continues to increase R&D to enhance market influence.

The company has more than 60 years of experience in defense interconnection technology and comprehensive advantages. The product system covers a comprehensive range and is rich in layers, and can provide overall interconnection solutions for complex systems. The company's defense products are divided into three categories: system interconnection products, defense connectors, and components. The technical indicators of products such as FMC series high-speed data connectors, JVNX series high-speed bus connectors, and JH series environmentally resistant connectors developed by the company have reached the international advanced level, and FMC, JVNX and other series connectors have been replaced by localization. The company is qualified to supply leading defense companies such as Aerospace Science and Engineering, China Telecom, China Military Engineering, etc., and has received many awards from national ministries and key research institutes and units, and is one of the leading suppliers of defense connectivity products in China. The company has begun to deploy new connectivity products and technologies in next-generation equipment, seize the opportunities of unmanned and intelligent transformation of equipment, continue to increase investment in product R&D and market development efforts, form market breakthroughs through product innovation, enhance industry influence and expand market size.

3. Communications: AI development is expected to drive the increase in demand for high-speed backplane connectors, leading technology to cover mainstream manufacturers.

AI has entered a stage of explosive development and is expected to drive an increase in demand for high-speed backplane connectors. The company will rely on the accumulation of high-speed interconnection technology and its position in the communications industry to vigorously lay out high-speed interconnection supporting products for servers, switches, and integrated computing switching node devices in the computing industry. The company will continue to expand the breadth of applications of various product portfolio connectors such as high-speed backboards and modules that have already been developed, such as terrestrial wireless communication scenarios such as fixed network routing, switching, and OTN.

The company has achieved coverage of many mainstream communication equipment manufacturers at home and abroad. The company focuses on product technology such as backplane connectors, power connectors, RF connectors, cable components, etc., and has formed a series of influential and competitive high-speed backplane connector products with various speeds. The company's high-speed connectors are in a leading position in the industry, and their performance has reached the level of leading enterprises in the same industry abroad. Currently, they are mainly promoting 56Gbps products, completing the development and small-batch production of 112G high-speed backplane products with orthogonal architectures, developing and continuously optimizing 224G products, and have reached a state where sample trial production has passed.

4. Industry: Participants in standard-setting for the domestic rail transit industry, actively expanding new energy sources are expected to contribute to new volume.

In terms of rail transit, the company is the earliest domestic enterprise to independently develop and support connectors and components for rail transit, and is also the earliest participant in railway industry connector standards. The company mainly provides integrated interconnection technology solutions and product services for many first-level and second-tier subsidiaries of CRRC Group. Products such as JL series circular connectors, HDC series heavy-duty connectors, and RT series electric hook assemblies independently developed by the railway industry are widely used. At the same time, it is also providing interconnection technology solutions and product services for the localization of high-speed EMUs.

In terms of new energy vehicles, the company provides solutions and product services such as high-voltage wiring harnesses, charging and distribution system assemblies for NEV batteries, electric drives, and electronic control systems from various application dimensions such as single/all-in-one, charging/power exchange, and BEV/PHEV. The company is one of SAIC-GM-Wuling's main suppliers. It has developed high-voltage connectors, high-voltage wiring harnesses, and charging and distribution system assemblies covering all customer electric models. At the same time, the company is one of BYD's main suppliers of high-voltage power distribution modules, providing high-voltage power distribution module solutions and products for customers' three-in-one electronic control systems, covering models from A-class cars to B-class cars. Based on the trend of “electrification” and “intelligence” in the automobile industry, we focus on creating products in the two major directions of “high voltage” and “high speed”; in line with the development trend of the automotive industry, expand research and development of products such as PDU, BDU, charging facilities, etc., and continuously launch products that meet customer needs to provide customers with complete automotive interconnection solutions.

5. Profit prediction and investment advice

In the field of communications, the company has achieved coverage of many mainstream communication equipment manufacturers at home and abroad, including Huawei. In the field of defense, the company is a designated supplier of defense connectors for national space projects; in the industrial field, the company focuses on developing automotive high-voltage connectors and wiring harnesses, charging interface connectors, BDU/PDU charging and distribution system assemblies and control modules, and has developed in-depth cooperation with manufacturers such as BYD and Wuling. In the future, with the release of demand for AI computing power, the recovery in demand in traditional industries, and the improvement of the macro environment, the company is expected to rebound in performance. We expect the company's 2024-2026 net profit to be 119 million yuan, 204 million yuan, and 284 million yuan respectively. Corresponding to the current stock price PE, the PE is 116X, 68X, and 49X, respectively, maintaining the “increase in holdings” rating.

Risk analysis

The communications business fell short of expectations. The company has a major advantage in communication products, especially high-speed backplane connectors. Changes in its communications business revenue are greatly affected by business changes and product demand adjustments from major downstream customers Huawei, ZTE, and Nokia. If the technological development of the company's communication products falls short of expectations or is not applied in batches by other customers to their communication equipment connection projects, it may have an impact on the company's revenue.

Defense business development fell short of expectations. The company's main defense business customers are enterprises and institutions under China's military industry group. Ultimately, defense business revenue mainly comes from the country's defense equipment expenses. If investment in national defense construction falls short of expectations, or causes production cuts or cancellation of the company's original supporting projects, this will adversely affect the company's production and operation.

The development of the new energy business fell short of expectations. If demand for new energy vehicles grows or the construction of supporting facilities for charging piles falls short of expectations, it may adversely affect the company's high-voltage connectors for new energy vehicles.

The gross margin fell short of expectations. If the price of upstream raw materials rises, the company's development of other customers falls short of expectations, or increased market competition, it will lead to a further reduction in gross margin.