Incident: The company released its 2023 annual report and 2024 quarterly report. The company's revenue in 2023 was 502 million yuan, -12.81% year over year; net profit to mother was 73 million yuan, or -37.72% year over year; deducted non-net profit of 65 million yuan, or -45.56% year over year. The 24Q1 company's revenue was 174 million yuan, +40.70% YoY, +33.40%; net profit to mother was 0.14 billion yuan, -14.27% YoY, -11.16% month-on-month; after deducting non-net profit of RMB13 million, -19.61% YoY, +18.95% month-on-month.

Game console parts revenue declined, and the increase in expenses during the period dragged down profits: In 2023, due to factors such as falling demand from end customers, the company's revenue declined. By product, game console components/connectors/precision manufacturing and others had revenue of 2.53/1.90/0.44 billion yuan, respectively, of -33.68%/+31.48%/+13.40% year-on-year. In 2023, the company's gross margin was 34.58%, -1.45 pcts year on year. Mainly due to the high gross margin of the game console parts business, which had a high gross margin, the gross margin decreased by 3.39 pcts year on year and the share of revenue declined; the net margin was 15.05%, -5.26 pcts year on year, mainly due to a sharp increase in expenses during the period that dragged down profits. 24Q1 gross margin was 38.29%, +2.75pcts y/y, +5.01pcts month-on-month; net margin was 17.59%, +4.44pcts yoy, +2.84pcts month-on-month. In terms of expenses, the 23-year sales/management/R&D/finance expense rates were 2.44%/11.79%/6.97%/-0.67%, respectively, compared to +0.74/+4.04/+1.48pcts. The company's management expenses increased due to the company's relocation to a new plant and an increase in upfront operating development expenses for new subsidiaries; in addition, the main transaction currency for the company's export sales was the US dollar. The current period was affected by exchange rate fluctuations, and the financial expenses rate increased due to the reduction in the company's exchange rate income.

Deeply bound to leading game console manufacturers and wait for customers' new console releases: the game console parts business was under pressure in '23, mainly the first-generation Switch from Company N entered the 7th year of the product cycle. Customer orders declined, and the scale effect of the company's game console parts business weakened. The company's products are represented by slides, TactSwitch, card slots, precise positioning controllers, and game console connectors. The terminal customers are mainly well-known Japanese companies N, Sony, META, etc., to form complete machine products by integrating other functional components, such as Foxconn and Goertek, and ultimately supply terminal customers. In order to cope with the decline in the game console parts business, on the one hand, the company will actively cooperate with key customers in product development work, continue to invest in R&D around core customer needs, continuously enrich product types and increase technical content to meet the needs of existing customers, and actively maintain and further explore the order potential of existing customers; on the other hand, the company will pay close attention to market trends, increase market expansion efforts, and promote the company's high-quality products to more potential customers, so as to obtain more opportunities for cooperation. With future updates and iterations of mainstream game consoles under N Company and Sony, the company is expected to continue to benefit from the rising demand for new products. In terms of AR/VR, the company's Joy-stick joystick series products successfully passed Meta certification in 2020 to be used as control controllers for VR/AR products under Meta's Oculus brand, and mass supply has begun.

The three major optical communication bases are fully produced, and automation equipment can be expected in the future: 1) Optical communication field: The company has independently developed and mass-produced MT/MPO: 2-core, 4-core, 12-core, 16-core, 24-core, 32-core, and 48-core products.

Currently, the company has three manufacturing bases: Shenzhen headquarters, Dongguan company, and Vietnam company. Among them, the Shenzhen headquarters and Vietnam company produce single-core optical fiber jumpers, single-core cluster optical fiber jumpers, multi-core MPO optical fiber jumpers, and optical splitters. The Dongguan company mainly focuses on MT ferrules and MPO connectors. Demand in the optical communications market is strong. As of June '24, the company's three production bases are basically full. In the future, the company will steadily increase and expand production capacity according to market demand. 2) Precision manufacturing field: The company's automation equipment business mainly includes automated visual inspection series products, automated assembly line products, etc., which are mainly used in the 3C electronics industry, connectors, FPCs, PCBs, sensors, etc. In February 2024, the company added a holding subsidiary, Xike Industrial. The main products of Xike Industrial include automatic curved surface polishing equipment, metal polishing equipment, and semiconductor polishing equipment. In the future, the company and its subsidiaries can share technology and customer resources to provide customers in the consumer electronics industry with more and more advanced automation equipment products, and further enhance the company's profitability.

Maintaining the “gain” rating: Switch enters a late stage of the product life cycle. The game console parts business may continue to be under pressure until the customer's new console is released, but the company actively maintains and further exploits the order potential of existing customers while continuing to expand new customers to balance the influence. In the future, the company will still fully benefit from the increase in demand for new machines from N customers. In terms of optical communications, market demand continues to be strong as AI computing power grows, and the three major bases are full of production capacity. We are optimistic about the future growth of this business, which is worth looking forward to. In terms of precision manufacturing, the subsidiary Xike Industrial's high-quality customers, including BYD, Foxconn Group, and Lixun Precision, are expected to continue to benefit from the recovery in consumer electronics demand. The company's net profit from 2024 to 2026 is estimated to be 94 million yuan, 122 million yuan, and 166 million yuan, EPS is 0.73 yuan, 0.94 yuan, and 1.29 yuan respectively, and the corresponding PE is 64X, 50X, and 36X, respectively.

Risk warning: risk of macroeconomic fluctuations, demand for game consoles falling short of expectations, risk of high customer concentration, risk of exchange rate fluctuations.