Incident: The company released its 2023 annual report and 2024 quarterly report. The company's revenue in 2023 was 1,317 billion yuan, +15.38% year over year; net profit to mother was 93 million yuan, -7.39% year over year; after deducting non-net profit of 72 million yuan, -4.07% year on year. 24Q1 revenue was 387 million yuan, +51.12% year over month, -7.04% month on month; net profit to mother was 0.25 million yuan, +38.59% year on month, +36.67% month on month; after deducting non-net profit of 20 million yuan, +22.96% year on month, +210.83% month on month.

The 24Q1 performance grew rapidly, and the three major businesses collaborated: the decline in the company's profit side in 2023 was mainly due to the influence of external factors such as industry sentiment and price competition, which led to a decline in product sales revenue and profit, which in turn affected the company's investment income loss of 20.7362 million yuan, a decrease of 34.0757 million yuan compared to the profit of 13.3395 million yuan in the same period last year. Excluding this impact, the company's actual net profit to mother was +30.74% YoY. 23-year business structure: Electricity equipment/military industry/electronic materials generated revenue of 740/3.29/44 million yuan respectively, +7.83%/34.13%/105.12% year-on-year. In 2023, the company's gross margin was 26.70%, -0.21pct year on year; net margin was 8.54%, -1.98pct year on year. 24Q1 gross margin was 20.24%, -6.09pct yoy, -7.38pct month-on-month; net margin was 6.41%, -0.81 pct yoy, -0.70pct month-on-month. In terms of expenses, the sales/management/R&D/finance expense ratios for 23 years were 3.48%/7.28%/4.52%/0.60%, respectively, and the year-on-year changes were -0.11/-1.47/ -0.22/+0.55pct, respectively. The increase in financial expenses was mainly due to an increase in short-term loans in the current period and an increase in interest expenses on mergers and acquisitions loans to increase the holding of Eager Machinery shares.

The power business benefits from the national grid construction+overseas power equipment renewal cycle, and the military business is expected to continue to grow at a high rate: 1) Electricity business: ① In '23, the company actively sank the user engineering market by strengthening in-depth cooperation with key customers such as the State Grid and the Southern Grid. In addition, the company is seizing opportunities to upgrade overseas power grids and actively laying out business overseas. The production and sales scale of vacuum arc extinguishers has exceeded one million, and sales revenue for high voltage vacuum extinguishers of 40.5KV and above has achieved significant growth, further consolidating its leading position in the market. The 126kV vacuum arc extinguisher was successfully developed. At the same time, product development of the 252kV vacuum arc extinguisher chamber and the 252kV double-fracture environmentally friendly GIS arc extinguisher was successfully completed according to customer requirements. According to the 23 annual report, samples have been submitted to the customer for verification. ② New electric and new energy complete equipment has made breakthroughs in offshore wind power, flexible DC power systems, environmentally friendly high voltage vacuum circuit breakers, etc., and is progressing smoothly. ③ High-power radio frequency electron tubes: The megawatt-class quadrupole developed by the company has filled the domestic gap in the field of controlled nuclear fusion; multiple types of high-power electron tubes developed by the company have successfully passed customer verification and batch supply, and have been successfully used in the field of semiconductor processing equipment such as domestic lithography machines; 500kW high-power electronic tubes successfully meet 100% of localized application requirements. Benefiting from the increase in demand for national power construction and overseas power equipment upgrades, we are optimistic that the company's power business will rise steadily in the future. 2) Military business: Eager Machinery's revenue in '23 was 201 million yuan, +27.31% year over year; net profit to mother was 483.966 million yuan, +73.89% year over year. The advantages of integrating precision casting, precision machinery manufacturing, assembly and general control are prominent, and the aerospace vehicle precision structural parts business continues to grow at a high rate. Xi'an Ruikong's revenue for 23 years was 130 million yuan, +45.88% year over year; net profit to mother was 21.927,500 yuan, +23.24% year over year. Give full play to the advantages of localized technology, actively promote the expansion of product terminal applications, and achieve rapid growth in the intelligent embedded computer business.

The fund-raising project is being implemented at an accelerated pace, and the aluminum nitride business is poised to advance: in 2023, the company achieved an annual production capacity of 240 tons of aluminum nitride powder, reached the leading domestic level of powder quality and industrial scale, broke the technology blockade and product monopoly of foreign industry giants, successfully replaced aluminum nitride powder domestically, and became the first company in China to prepare commercial aluminum nitride powder-substrate-HTCC and high-end functional device products in the entire industry chain. 1) Aluminum nitride substrate: The design capacity of the first phase of the project has reached production, and the product yield has reached more than 80%. At present, the products have been verified and supplied by more than 70 electronics companies in the downstream fields of LED, laser heat sink, IGBT, etc., and have become the main supplier of aluminum nitride substrates in China. 2) Aluminum nitride HTCC: It has completed the development of an independent raw material formulation system and the development of an independent paste system. The products have been certified by some domestic and foreign customers and supplied in small quantities. Products such as high-precision aluminum nitride functional devices and chip packaging tubes have been used in new energy vehicles, military industry, etc., and the annual production capacity has now reached 50,000 pieces. 3) Structural parts in the semiconductor field: The design and production capacity of the first phase of the project has been achieved. The products have been certified by more than 50 domestic and foreign customers. The large-size structural parts produced by the company have been widely used in lithography, etching, thin film, and ion implantation processes in the semiconductor industry. 4) Material substitution in the photovoltaic industry: The development and delivery verification of four new products to replace aluminum nitride materials was completed in line with customer needs. Two of these products have been verified by leading PV customers and have been delivered in batches, and the remaining two products are being verified.

Maintaining the “gain” rating: The company actively grasps opportunities for national grid construction acceleration and overseas power equipment renewal and iteration, continuously develops new products and markets in line with customer needs, and continues to consolidate the market advantage of power business products. We are optimistic that the power business is expected to grow steadily in the future. The military business is deeply involved in the field of “bombs, aircraft, and ships”. Multiple orders and projects have been launched one after another, and the advantages of industrial integration have been steadily unleashed. Aluminum nitride powder has been successfully replaced by domestic production, and fund-raising projects have been implemented at an accelerated pace. The smooth release of future production capacity is expected to bring a significant increase in the company's performance. The three major businesses are expected to be efficiently linked to take advantage of industrial synergy. It is estimated that the company's net profit for 2024-2026 will be 173 million yuan, 250 million yuan, and 320 million yuan, and EPS will be 0.21 yuan, 0.30 yuan, and 0.38 yuan respectively. The corresponding PE is 32X, 22X, and 17X respectively.

Risk warning: risk of macroeconomic environment fluctuations, increased risk of market competition, risk of exchange rate fluctuations, risk of raw material price fluctuations.