Incident: The company released its 23rd annual report, achieving revenue of 1,676 billion yuan, compared to -33.02%. The main reason is that the downstream market boom in the electronic components industry is weak, customer demand continues to be sluggish, sales volume and price declines, and sales revenue from major customers in the superposition agency business declined; achieving net profit of 272 million yuan, -66.15% over the same period. The main reason is that the company increased investment in expanding new businesses such as microprocessors, microcontrollers and supporting integrated circuits, microwave modules, and micronano systems. Intensive R&D expenses have been increased, and efforts to introduce talents have been strengthened. The number of employees continues to grow net, while maintaining a basic stability in employee remuneration levels, and overall labor costs have been rising steadily. In the first quarter of '24, we achieved revenue of 429 million yuan, -1.44% year-on-year, and realized net profit of 72 million yuan, or -28.70% year-on-year.

We believe that due to sluggish downstream demand, the company's performance is under pressure in the short term, but the company's overall industry scale, which radiates from products such as porcelain dielectric capacitors, filters, microprocessors, microcontrollers and supporting integrated circuits, microwave modules, and micro-nano system integrated ceramic tube shells, is gradually expanding, and continuously adjusting and optimizing the product structure. As industry prosperity gradually recovers, the company's performance is expected to gradually recover in the long run.

The low level of gross profit of new products affects overall profitability. R&D investment continued to increase the company's 23-year gross profit margin by 40.52%, -9.63pct year on year; net profit margin 16.13%, -15.97pct year on year. Among them, the gross margin of sales of the company's self-produced electronic component products was 63.71%, or 17.20pct. The main reason was that the company's core product, porcelain dielectric capacitors, were affected by both price declines and unit cost increases. At the same time, the gross profit level of microcontrollers and supporting integrated circuit products and other electronic component products such as microwave modules launched by the company was still low but the revenue growth rate was large, and the revenue structure increased, further lowering the overall gross profit level of self-produced electronic component products. The gross margin of agent electronic component products was 10.61%, -0.17pct year on year, which is basically the same as the same period last year. The company's cost rate for the period was 19.24%, +7.96pct year on year, of which the sales expense ratio was 5.70%, +2.66pct year on year, mainly due to the company increasing business-related expenses to cope with the external environment where market demand was weakening, while expanding new business and expanding the sales team, and labor costs and sales-related expenses also increased accordingly; the management expense ratio was 6.95%, +2.86pct year on year. The company's expansion of new business brought about an increase in management personnel costs, professional service fees, and long-term asset depreciation and amortization expenses; the financial expense ratio was 0.21%, the same as Compared to +0.01pct; the R&D cost rate was 6.39%, compared to +2.45pct. The main reason was that the new business expanded by the company required a continuous increase in R&D investment, and the company's core product, porcelain dielectric capacitors, maintained the intensity of R&D investment in the face of declining revenue.

Filters/microcontrollers bucked the trend and are expected to become the second growth curve. In 2023, the company's self-produced electronic component products achieved operating income of 919.502 million yuan, a year-on-year decrease of 33.03%. Mainly the company's core product, porcelain dielectric capacitors were affected by the external environment, and sales prices fell short of expectations. At the same time, due to low cost procurement pressure from customers, the sales price declined, resulting in sales of only 800.0816 million yuan for porcelain capacitors throughout the year, a decrease of 38.10%; filter products, microcontrollers and supporting integrated circuit products were sold separately Revenue of 24.622,700 yuan and $54.7477 million increased by 14.21% and 156.42%, respectively, compared with the same period last year. The company achieved revenue of 741.3398 million yuan as an agent for electronic component products, a decrease of 32.85% over the same period last year. Mainly, some core industrial customers and consumer customers were affected by external markets, and business recovery fell short of expectations.

Profit forecast: We believe that with the development of China's national defense construction, the equipment modernization process is accelerating. In particular, the electronic, informatization, intelligence, and localization of equipment continues to advance, the market prospects for high-performance, high-quality porcelain capacitors as basic units are broad, and demand is expected to gradually recover in the long term. At the same time, as new products in the filter and microwave sector gradually achieve mass production, it is expected to bring a new growth curve to the company. Due to a significant decline in fundamentals in 23, based on the 23-year base, the company's net profit to mother for 2024-2025 was lowered from 12.31/1,474 million yuan to 360.09 million yuan, and net profit to mother in 2026 was 663 million yuan. The corresponding PE was 22.40/15.85/12.17X, respectively, maintaining a “buy” rating.

Risk warning: risk of changes in downstream market demand, risk of price reduction of highly reliable products produced in-house, risk of product quality control, risk of large accounts receivable balance, etc.