Key points of investment:
Incident: Dongshan Precision announced foreign investment. The company decided to increase Yancheng Weixin's capital by 30 million US dollars with undistributed profits, and the PCB business ranked third in the world. MFLX, a subsidiary of Higashiyama Precision, is one of the core FPC suppliers for high-end consumer electronics products such as iPhone, Watch, and Airpods. Since 2017, MFLX's revenue growth rate has been much higher than that of the industry, and it has expanded NEV customers such as Tesla; Multek is an important supplier of digital PCBs, improving asset management efficiency. According to Prismark, Higashiyama Seimitsu ranked 3rd in the global PCB industry in 2021-23. In 2022 - 23, the company's PCB business achieved a 21% higher gross profit margin.
Develop new energy vehicles around Tesla. FPC and functional structural components are expanding into the field of new energy. According to the 2022 annual report, Dongshan Precision's new energy business revenue is about 2.37 billion yuan. The three major products in the Dongshan Precision NEV business: 1) Traditional precision components segment. The core products mainly include tri-electric structural parts, batteries, heat dissipation, etc. 2) In the electronic circuit sector, the increasing degree of electrification of new energy vehicles is also increasing the demand for FPCs and hard boards. 3) Optoelectronic Display Division, merged with JDI subsidiary Suzhou Jingdian in 2023.
Strengthen overseas layout and continue to forge ahead in the PCB business. Since 2022, production sites have been established in Mexico (self-built), the United States (purchased and built), and Thailand (self-built, not put into operation). The Mexican and US plants mainly serve NEV customers; the Thai plant is under construction. The products are mainly PCBs (including FPC), providing opportunities for further growth in the PCB business.
Steady management strategy, financial expense ratio has declined markedly. The fee rate fell from 13.32% to 11.86% in the 2019-2023 period. Among them, the financial expense ratio fell from 2.95% to 0.56%, which was the main reason for the decline in the fee rate during the period. Interest expenses fell from 0.692 billion yuan to 0.464 billion yuan, and the share of interest expenses in revenue fell from 2.94% to 1.38%.
The profit structure is dominated by FPC, and adjustments to the LED business are expected to reverse losses. In 2023, Higashiyama Precision's comprehensive gross profit was 5.11 billion yuan, including gross profit of 4.84 billion yuan for the PCB business, 0.45 billion yuan for the communication precision components business, 0.09 billion yuan for the LCM business, and -0.32 billion yuan for the LED and module business. LED and touch display LCM gross profit declined sharply from before 2021, and was in a loss in 2023. The company will further improve capacity utilization by developing new customers, and strive to reduce or even lose money.
Adjust profit forecasts to maintain a “buy” rating. Due to large losses in the LED business, the 2024 net profit forecast was lowered from 3.518 billion yuan to 2.116 billion yuan; the 2025/26 net profit forecast was added to the 2025/26 net profit forecast of 2.485/3.605 billion yuan. The current stock price corresponds to 2024/25 PE only 20/17X. Guochain Comparable Company (Lixun Precision, Pengding Holdings, Goertek stock price) has an average PE of 28/24X on 24/25, with Dongshan Precision's target valuation room for 39% increase. We are optimistic that the development strategy and asset quality will continue to improve over the next 3 years, and maintain the purchase rating.
Risk warning: 1) Overseas sales accounted for 83% in 2023, and there is a risk of profit and loss on deposit and exchange. 2) New energy vehicle products have fallen short of expectations. 3) Profit improvements in LED, touch and LCM businesses fell short of expectations