Established as an established stamping company, the scope of capabilities continues to expand: Wuxi Zhenhua was founded in 1989. Its main business mainly includes traditional stamping and mold business, sub-assembly business, and precision electroplating business. We believe that in recent years, the company's business scope has continued to expand, and its profitability and boundaries have gradually widened: 1) The main stamping business has been revitalized: customer resources are a key element of the competitiveness of stamping manufacturers. The company supplies new power customers such as Xiaomi and new energy models from traditional car companies such as SAIC Motor to usher in new development opportunities; 2) The division assembly has accompanied SAIC Motor to grow together overseas:
The share of the split assembly business in revenue continues to increase, and it is expected that SAIC will continue to benefit from the expansion of SAIC Motor's overseas expansion; 3) The new electroplating business increased profits: the company completed mergers and acquisitions with Wuxi Kaixiang in 2023, added selective precision electroplating processing services, stricter fuel vehicle emission requirements, and rapid growth in hybrid vehicle sales brought growth opportunities to the company's electroplating business or further increased the company's profits.
Actively transforming new energy, the main stamping industry has ushered in new opportunities: the development of new energy vehicles brings new opportunities to the traditional stamping industry. We expect the market size of metal stamping parts for passenger cars to reach 253.1 billion yuan by 2026E, or 2.3% Ecagr in 2022. Among them, the NEV metal stamping parts market can reach 105.8 billion yuan, and the 2021-2026E CAGR is 20.0%. However, customer resources are a key element in the competitiveness of stamping manufacturers. We believe that new car builders that have just entered the market, such as Xiaomi Motors, have not yet formed a fixed supply system, bringing new opportunities to Wuxi Zhenhua to actively lay out the new energy business.
Expanding the sub-assembly and linking SAIC Motor's steady growth: The company is deeply tied to SAIC Motor Group and specializes in providing sub-assembly services for SAIC passenger cars. In recent years, the share of the company's sub-assembly business in revenue has continued to rise, and the share of revenue in 2023 has reached 25.5%. We believe that by deeply binding SAIC Motor Group, the company is expected to continue to benefit from the acceleration of domestic cars going overseas. Furthermore, the split assembly business is an important source of profit for the company. As the company continues to expand its business layout and the share of revenue of the split assembly business gradually increases, the company's revenue and profit have grown steadily.
The addition of the electroplating business opens a second growth curve: We believe that adding selective precision electroplating processing business or starting the company's second growth curve is mainly due to: 1) tighter fuel vehicle emissions requirements and rapid growth in hybrid vehicle sales bring growth opportunities to the company's electroplating business or further increase the company's profits; 2) the company is tied to United Electronics, and the leading position in domestic electroplating is stable, and the rich product layout is expected to open up new markets.
Profit forecast, valuation and rating: We are optimistic that the company's three major businesses will go hand in hand, and profitability will gradually increase. The net profit of 2024E/2025E/2026E is expected to be RMB 398 million, 467 million yuan, 519 million yuan (corresponding to a year-on-year growth rate of 44%/17%/11%). It covered Zhenhua, Wuxi for the first time, with a target price of RMB 23.96 (corresponding to about 15x 2024E PE) and a “buy” rating.
Risk warning: Core customer sales fall short of expectations, electroplating business development falls short of expectations, and risk of fluctuating raw material prices.