Xinquan Co., Ltd. is a leading supplier of automotive accessories in China. The company was founded in 2001 and has been deeply involved in the automotive accessories industry for many years and has relatively complete automotive accessories products, mainly including instrument panel assemblies (24H1 accounts for 66% of revenue), door panel assemblies (15%), roof cabinet assemblies (1.2%), and bumper assemblies (2.3%). Currently, the company's customer structure is dominated by autonomous and new energy vehicle companies, including internationally renowned electric vehicle companies (about 20-25%), Geely (about 20-25%), Chery (about 15-20%), and BYD (about 5%).

Xinquan Co., Ltd. is one of the white horses for high growth in the industry in recent years. We believe that the company can use industry-leading economies of scale to build better cost control capabilities and further enhance profits. At the same time, with the release of overseas production capacity and the growth of exterior products, it is expected to once again enter a new round of growth cycle to achieve simultaneous “endogenous+extension” growth.

Endogenous: The cost advantage forms an internal cycle of growth. We believe that after years of intensive cultivation in the accessories industry, Xinquan Co., Ltd. has formed a positive cycle of growth model, that is, controlling costs to shape cost-effective products, obtaining more high-quality customers, and supporting high-quality projects to form large-scale production further provides “soil” for cost control, so that the company can maintain its leading position in the decoration industry. We analyze the company's advantages over competitors from the two dimensions of fixed costs and variable costs:

1. Fixed costs: The company's fixed costs account for about 15-20% of revenue, which is basically lower than competitors' 5-15pp. In particular, depreciation and amortization, wages and remuneration account for a lower proportion of revenue. Specifically: a) Depreciation and amortization:

It accounts for 2-4%. Compared with competitors, the cost ratio can be lower than competitors' 1-5pp, thanks to the company's control over the intensity and efficiency of production capacity investment. b) Wage and remuneration: It accounts for 10-15%. Compared with competitors' competitiveness in this project, the cost ratio is basically 5-10pp lower than that of competitors, thanks to the company's focus on the balance of per capita remuneration and output.

2. Variable costs: Compared with competitors, the company's freight, packaging costs, storage costs, and production related variable costs are higher. We think the reason is that the company needs to purchase assembly products such as air vents and cigarette holders through external customization. The proportion of outsourcing has declined in recent years, and there is room for further cost reduction and efficiency in the future.

Outreach — Actively layout overseas markets. In order to better serve the company's customers and open up the international market, Xinquan Co., Ltd. has promoted an internationalization strategy since 2019. Currently, the company has invested in setting up companies and production bases in Malaysia and Mexico, and set up subsidiaries in the US and Slovakia to cultivate the Southeast Asian, North American and European markets and promote the company's business expansion to the world.

Epitaxial — Develop exterior products. With the accumulation of mold design, injection molding technology, and assembly assembly processes, the company is also continuously developing exterior products. Currently, the company's exterior products include exterior accessories such as bumper assemblies and sink tanks. As the company's decoration product line continues to be enriched, the company's supporting categories and share in the customer system are expected to increase further in the future. In the first half of 2024, the company's revenue growth rates for bumper assemblies and exterior accessories were +387% and +148%, respectively, the company's two fastest growing products in the first half of the year.

Investment suggestions: In the short term, the company is expected to continue to benefit from increased sales volume or targeted catalysis from autonomous and new energy customers; in the medium to long term, the company is expected to further utilize its cost control capabilities to increase profits, and at the same time obtain more supporting shares and supporting amounts within the customer system to achieve endogenous growth, domestic+overseas, and multi-dimensional interior+exterior growth. We expect the company's 2024-2026 net profit of 1 billion yuan, 1.4 billion yuan, and 1.86 billion yuan, with growth rates of +24%, +40%, and +33%, corresponding to 19, 14, and 10 times PE on September 22, 2024, covered for the first time, and given a “buy” rating.

Risk warning: macroeconomic fluctuations, increased competition in the NEV industry, customer sales growth falling short of expectations, new product development and customer acquisition progress falling short of expectations.