1H24 results fall short of our expectations

The company announced 1H24 results. Revenue reached 1.58 billion yuan, a decrease of 14.6%, and net profit to mother reached 0.14 billion yuan, a decrease of 33.3%. The performance was lower than our expectations, mainly due to business growth pressure such as some engraving machines and new types of tobacco. On a quarterly basis, 1Q/2Q revenue decreased by 12.3%/16.6%, respectively, and net profit to mother decreased by 30.6%/35%, respectively.

Development trends

1. Revenue from automotive electronics and Ebike is growing rapidly, and the engraving machine and new tobacco business is under pressure in the short term. Looking at the 1H24 business segment: 1) Automotive electronics: Revenue also increased by 21.9% to 0.27 billion yuan. Products such as electronic anti-glare mirrors, refrigerator control, and steering wheel departure detection are growing rapidly. Customers such as SAIC Audi and India's Cord have been successfully introduced, and domestic and overseas markets are expected to be jointly developed; 2) Innovative consumer electronics: revenue also fell 7.6% to 0.48 billion yuan. Among them, Ebike is expected to grow rapidly as overseas channel inventory falls and order pace recovery. Cricut engraving machines may still be under pressure in the short term due to increased market competition. The transition period of the core module to the whole machine limited growth; 3) Intelligent control components: revenue fell 6.5% to 0.59 billion yuan, with water-cooled cooling products or relative pressure, orders from major customers such as Logitech are steady and improving, and business expansion or driving subsequent growth in the new energy sector; 4) Healthy environment: revenue also fell 75.9% to 0.06 billion yuan. The main pressure was due to intense competition from cross-border e-commerce, etc., and downstream customer inventories are still being adjusted.

2. Automotive electronics drive a month-on-month increase in Q2 gross profit, and focus on subsequent profitability improvement trends. On the gross profit side, the company achieved a gross margin of 29.2% in Q2, -1.9pp/ +1.6ppt, respectively, and the month-on-month improvement was mainly due to the positive growth of the high-margin automotive electronics business; on the cost side, the Q2 sales/management/R&D/financial expenses ratio was +0.4pp/+1.2ppt, and the company continued to increase R&D investment in multiple categories, and the reduction in exchange revenue led to an increase in financial expense ratios. Under the combined influence, the company's Q2 net profit margin reached 9.9%, down 2.8ppt. We believe that with the improvement of multiple business operations, profits are expected to improve in the future.

3. Mexico's production capacity helps global production and delivery, and focus on new tobacco, engraving machines, etc. to resume growth trends.

On the production capacity side, the company 1H24 has completed the purchase of land for the intelligent manufacturing base in Mexico. The first phase of the project is expected to be completed in 2025. We believe that strengthening the company's global operations will improve order fulfillment efficiency in North America and other regions and help obtain high-quality customers. Looking ahead, we believe that with the simultaneous development of automotive electronics at home and abroad, the continued growth of Ebikes, the production capacity of new tobacco projects, and the recovery of engraving machines, the company's operations are expected to grow better, and the development of new businesses such as smart medicine, home, and pets is expected to open up medium- to long-term growth space.

Profit forecasting and valuation

Considering that businesses such as new tobacco and engraving machines are still in the adjustment period, the 2024/25 net profit forecast was lowered by 35%/36% to 0.36/0.42 billion yuan. The current stock price corresponds to 24/21 times P/E for 2024/25. Maintaining an outperforming industry rating, the target price was lowered by 16% to 15.7 yuan based on profit forecast adjustments and changes in market risk appetite, corresponding to 33/29 times P/E in 2024/25, with 38% upside.

risks

Major customer orders are at risk of loss, exchange rates fluctuate greatly, and new product development falls short of expectations.