Description of the event

The company released the 2023 annual report and the 2024 quarterly report. In 2023, it achieved revenue of 2,660 million yuan, -1.35% year on year; realized net profit of 396 million yuan, -4.44% year on year; realized net profit without return to mother of 357 million yuan, -4.61% year on year. 2024Q1 achieved revenue of 585 million yuan, -6.48% year over year; realized net profit of 65 million yuan, -19.59% year over year; realized net profit without deduction of 57 million yuan, -19.47% year on year.

Incident comments

Demand was compounded by price competition in 2023, which affected the company's revenue and profits, but the sales volume of speed reducers continued to rise. In 2023, insufficient market demand was compounded by falling raw material prices, leading to more intense market competition and pressure on product prices, bringing great resistance to the company's business development. However, the company achieved sales of about 654,500 units of speed reducers throughout the year, +7.64% over the same period last year, and its market share is still increasing. Looking at business segments, the gear reducer business performed well and was resilient, with revenue +2.20% compared to the same period; the sales volume of industrial gearboxes was +20% compared to the same period, and the market share also increased further. Revenue from cycloid reducers (-10.85% YoY) and GNORD reducers (-15.30% YoY) declined to varying degrees. The company's overseas revenue contributed to the increase, mainly benefiting from continuing to stabilize its market position in the Southeast Asian papermaking, palm oil industry, and Middle Eastern rubber extruder industry, and achieving new and repurchase orders in the metallurgy, mining, grain storage and other industries in the Russian market.

Price competition in the industry is fierce, and the company's profitability performance is under pressure. We look forward to a marginal improvement in the competitive pattern this year. The gross margin and net margin of the company in '23 were 26.01% and 14.78%, respectively, -0.73pct and -0.49pct; the gross margin and net margin of the 24Q1 company were -4.17pct and -1.73pct, respectively. However, the company's expense control continues to be optimized. In 2023, sales expenses and management expenses were -2.61% and -20.25% year-on-year, respectively, and the overall cost ratio for the period was -0.20pct year over year.

The company continues to promote the expansion of product categories and application fields. Over the past 23 years, it has made progress in more than 23 segments, and continues to consolidate its market competitiveness. In 2023, the company added 40,000 general-purpose reducer product models to meet the customized needs of different customers, and improved the hard-toothed ZY-C series reducer, which greatly improved the oil spill problem and improved the performance of the product. GNORD's high-end products were disrupted by the short-term decline in the lithium battery boom, but the company actively expanded industries such as injection molding machines, HAECO, pharmaceuticals, food, grain and oil, etc., such as delivering prototype reducers for medium and large injection molding machines to Engel, and the D1 series reducer successfully applied the customer's Yantai Port project. Subsequent downstream customer diversification and expansion in segments are expected to promote the market sales of GNORD's high-end products. The development of the engineering planet business is more diversified. 1) In '23, the company grasped the upward trend in shipping and marine engineering and received orders for tens of millions of marine products; 2) the supply share of major customers in the construction machinery sector continued to increase. 3) In the field of new energy, serial development of photovoltaic rotary speed reducers from 5 inch to 9 inch has been realized. Samples of pitch yaw reducers in the wind power sector have been tested by well-known OEMs, saving energy for subsequent business. The harmonic speed reducer business further increased production capacity after relocating the manufacturing base to the headquarters factory in Changzhou. At the same time, new harmonic reducer products have been developed and developed for four-axis and five-axis machine tools, humanoid robots, etc. The company's harmonic reducer business is in its infancy and is expected to contribute incremental revenue in the future. In addition, the company intends to acquire 65% of Modoli Drive's shares, quickly enter the field of precision planetary gearboxes, and expand the layout of industrial automation fields such as laser cutting machines, CNC machine tools, and robots/robots.

Maintain a “buy” rating. Weak short-term demand combined with price competition affects the company's operations. In the long run, the company lays out general, special purpose and high-end speed reducers, etc., and expand the reducer circuit to consolidate the company's long-term growth. The company is expected to achieve net profit of 501 million and 581 million in 2024-2025, corresponding PE is 19x and 17x, respectively.

Risk warning

1. Risk of manufacturing repair falling short of expectations; 2. Risk of developing special speed reducers and high-end speed reducers falling short of expectations.