Incident: In 2023, the company achieved operating income of 20.074 billion yuan, +26.75% year on year, net profit of 3.339 billion yuan, +22.86% year on year, net profit not attributable to mother of 3.245 billion yuan, or +23.73% year on year. In Q1 2024, the company achieved operating income of 4,013 billion yuan, -24.87% year-on-year, mainly affected by the slowdown in order pace in the defense sector; net profit to mother was 751 million yuan, -24.41% YoY; net profit after deducting non-net profit of 736 million yuan, -24.80% YoY. We believe that the defense sector is in the late stages of centralized equipment delivery in the first quarter, and the order pace has slowed down, but as new research projects begin to be ordered one after another, the defense sector is expected to enter a new round of procurement and order cycle; furthermore, the company's market expansion in the defense sector has achieved new breakthroughs, the preferred position of interconnection solution suppliers continues to consolidate, and the high-end civilian manufacturing business focuses on strategic emerging industries such as data centers, petroleum equipment, and photovoltaic energy storage to achieve rapid growth.
Profitability is steadily improving, and maintaining high investment in R&D
In 2023, the company's gross profit margin was 37.95%, +1.41pct year on year, of which the gross profit margin of electrical connectors and integrated interconnect components was 40.92%, +0.86pct year on year; the gross profit margin of optical connectors and other optical devices and optoelectronic equipment was 26.44%, +3.71 pct year on year, and the gross margin of various businesses increased steadily. The company's cost rate for the period was 19.49%, +2.41 pct. Among them, sales/management/finance/R&D expenses rates were 2.66%/6.64%/-0.75%/10.95%, respectively, +0.01/+0.90/+0.65/+0.86pct, respectively. The rapid increase in management expenses was mainly due to the company's implementation of a restricted stock incentive plan (Phase III). The amount of equity incentives and amortization amounts increased rapidly, mainly because the company continued to strengthen its innovation drive, strengthen technological empowerment, and achieve new breakthroughs and increase in scientific and technological innovation achievements R&D investment.
Various businesses are growing steadily, and the international layout is being actively promoted
In 2023, the company's electrical connectors and integrated interconnect components achieved revenue of 15.50 billion yuan, +27.17%; the optical device-related business achieved revenue of 3.147 billion yuan, +27.26% year over year; liquid cooling solutions and other products achieved revenue of 1,427 billion yuan, +21.35% year-on-year, and all businesses maintained steady growth. At the same time, the company is committed to becoming a “world-class interconnection solution provider”, and international expansion is one of the company's important development directions. During the “14th Five-Year Plan” period, the Vietnamese subsidiary officially entered the global supply chain resource pool for key international customers. The German subsidiary fully implemented localized operations, and achieved phased achievements in international business development. We believe that the company insists on promoting the global layout of international business, deepening cooperation with international customers, and increasing the promotion of new products and businesses. It is expected that the company's share of international business will increase overall in the next 3-5 years; at the same time, it will continue to consolidate its leading domestic position in the field of defense, further accelerate its business layout in the fields of commercial aerospace, low-altitude economy, unmanned equipment, satellite Internet, deep-sea equipment, etc., and increase its position in intelligent connected vehicles, new energy equipment, data centers, photovoltaic energy storage, industrial control, high-end medical equipment, and orbits Transportation and other fields give full play to product and technical advantages and consolidate high-quality customer groups, which is expected to support the steady growth of their performance.
Accelerate the modern industrial layout and steadily improve industrialization capacity. In 2023, the company accelerated modern industrial capacity building, successfully completed the basic device industrial park (phase 1) project, began a new high-end manufacturing journey, the high-end interconnect technology industry community, civil aircraft and industrial interconnection industrial park were fully started, the Shenyang Xinghua aero engine wiring harness and small fan production capacity improvement project comprehensive assembly support center and Taixing Aviation's photoelectric liquid cooling source series product integration system project successfully capped. The company accelerated its industrial layout and steady improvement of industrialization capacity.
Profit forecast: Based on the decline in the company's 2024Q1 operating profit, considering the complex and severe international format and the risks of special equipment support services, we reasonably lowered our expectations: we expect the company's net profit to be adjusted from 43.25/5.470 billion yuan to 38.04/4.564 billion yuan respectively in 2024 to 2025. The company's net profit to mother is expected to be 5.404 billion yuan in 2026. The corresponding PE after adjustment is 20.83/17.36/14.66X, maintaining the “buy” rating.
Risk warning: Technology research and development falls short of expectations; downstream demand and order fluctuations; military business demand falls short of expectations; expansion of civilian products such as new energy vehicles falls short of expectations, etc.