Incident: In March '24, the company's Cixi NEV auto parts industry base passed comprehensive inspection and entered the production stage in 24Q2. In the past two years, the company's domestic and foreign customers have been steadily expanding, and the order volume has gradually increased. The new base will further enhance the production capacity and production efficiency of the automobile business and lay the foundation for future new customer expansion. In addition to the automotive business, smart terminals are also continuously expanding customers, and new technologies such as AI are opening up space for business growth such as smart homes, servers, and smart meters. Our review is as follows:

The new Cixi NEV plant was successfully put into operation, further improving production capacity and production efficiency. In the future, we will continue to focus on order increases and new customer development. The company's automotive electronics business has maintained a rapid growth trend over the past two years, mainly due to the continuous increase in order volume and customer expansion in the NEV molding business, expanding from old customers such as Panasonic to new overseas customers such as Nidec and Denso. The number of targeted projects corresponding to overseas terminal brands such as BMW and Cadillac continues to increase. At the same time, leading domestic electronic control and battery customers have also made breakthroughs. According to the company's announcement, it has entered the Xiaomi automotive industry chain through leading electronic control customers this year. The Cixi New Energy Auto Parts Industry Base, which the company invested in through a convertible bond project in March '24, has passed comprehensive inspection and was put into operation ahead of schedule 24Q2. The new base will expand the company's automotive molding production capacity, while the degree of automation is significantly improved compared to the old plant, which will further improve production efficiency and profitability, and lay the foundation for new customers and new orders in the future. We believe that the penetration rate of plastic inserts in new energy vehicles is still very low. In particular, the penetration rate of North American and domestic car brands is extremely low, and it is expected to become the focus of growth in the future. In addition, the company is also developing forward-looking technologies such as hydrogen energy with downstream customers.

The smart terminal business benefits from the expansion of leading overseas customers and the empowerment of new technologies such as AI and Wi-Fi 7. The company's Vietnam and Indonesia bases for overseas customers have been operating normally for more than two years. In 2023, the company's smart terminal business was affected by insufficient downstream demand and iteration of new technology. Looking forward to 2024, especially the second half of the year, the smart terminal business will resume growth as customer inventory removal and demand improvement, and mass production of new products such as WiFi-7. Looking ahead to the next two or three years, the smart terminal business can be expected to grow: 1) the company's downstream IoT and server product innovation will accelerate under new technologies such as AIOT and WiFi-7, which is expected to drive new demand; 2) It is expected to expand overseas leading IOT, smart meter, security, and server customers and increase share; 3) With years of experience in overseas base operations, the company accounts for a large share of overseas revenue. We judge that overseas production capacity will continue to expand and continuously improve operational efficiency in the future.

Net profit increased significantly year-on-year in 24Q1, and the growth trend remained unchanged in 24Q2 and throughout the year. 24Q1 achieved revenue of 500 million yuan, +4.06% YoY/-3.77%; net profit to mother of 73 million yuan, +40.13% YoY/-5.87% month-on-month; net profit after deducting non-return to mother of 71 million yuan, +40.34% YoY/4.83% YoY; net profit margin 14.5%, +3.74pcts/month-on-month -0.31pcts. Revenue growth is mainly due to the rapid growth rate of the NEV business. The increase in the share of automobile revenue also led to an increase in gross margin. The 24Q1 gross profit margin was 28.85%, +2.83 pcts/month-on-month +0.95 pcts. Looking ahead to 24Q2 and the whole year, due to the short-term drag of the new plant on the Q1 business of some customers, we expect the NEV business to maintain a high growth trend; the smart terminal business in Q1 has yet to recover significantly. With the implementation of subsequent new technology products and new customer orders, it is expected to return to growth in the second half of the year.

The 2024 employee stock ownership plan covers 170+ middle and senior core employees, demonstrating confidence in development. On the evening of April 22, the company announced a new draft employee stock ownership plan. It will provide incentives for no more than 176 people. The number of underlying shares held will not exceed 4.0725 million shares, accounting for 1.37% of the company's total share capital. The price of the employee's shareholding plan to buy back shares is 11.00 yuan/share. The company-level performance assessment target for this employee stock ownership plan is: based on 2023 net profit, 2024/2025/2026 net profit growth rate of not less than 15%/40%/60%, or based on 2023 revenue, 2024/2025/2026 revenue growth rate of not less than 15%/40%/60%. The estimated share payment fees for 2024-2027 are 1241.66/1489.99/714.59/20.72 million yuan, respectively.

Maintain an “overweight” investment rating. We continue to be optimistic about the performance growth of two-wheel drive companies in the automotive electronics and smart terminal business. The penetration rate of new energy vehicle inserts is extremely low, and there is broad room for long-term growth; the smart terminal business benefits from AI empowerment and the expansion of leading customers. We forecast 24-26 revenue of 26.01/33.75/4.314 billion, net profit to mother of 3.64/4.69/618 million yuan, corresponding EPS of 1.22/1.58/2.07 yuan, corresponding to the current PE price of 19.2/14.9/11.3 times, maintaining an “incremental” rating.

Risk warning: Downstream demand falls short of expectations, industry competition increases risk, technology iteration risk, macroeconomic and policy risk.