The company is a well-known domestic brand in the field of industrial control focusing on the field of industrial control automation. The core products are PLC, servo systems and man-machine interfaces, accounting for 36%/49%/12% of revenue in 2023, respectively. As a well-known domestic brand of industrial control, the company outperformed the industry in terms of revenue in the fields of PLC, servo systems, and human-machine interface, but net profit continued to decline in 2021-2023 due to the two core factors of ① slowing macro demand, falling comprehensive gross margin + ② front-end business layout, and rising cost rates during the period. With a marginal recovery in domestic demand and a recovery in comprehensive gross margin, net interest rates have stopped rising steadily in 2024. As the company's front layout on both sides of R&D and marketing gradually gains strength, the cost ratio is expected to decline steadily during the period, and the net interest rate is expected to continue to rise and there is plenty of room. 2024 may be an inflection point in the company's profitability.

The industrial control industry has broad market space, and the prospects for domestic substitution are bright

Industrial control devices are the core foundation of industrial automation. According to Rui Industrial data, the overall domestic industrial control automation market size in 2023 is about 291 billion yuan. According to Grid Victory Data, the market share of local brands in 2023 is about 53%. By product, the PLC market size is about 16 billion yuan, and the localization rate is only about 20%. Xinjie Electric is the domestic core brand, ranking fourth in the industry and second in domestic investment. The servo system market size is about 21.4 billion yuan, and the localization rate is about 55%. Domestic brands have relatively large advantages. The Xinjie Electric industry ranks 8th and domestic investors rank third. The human-machine interface market size is 40.8 billion yuan. The Xinjie Electric industry ranked sixth, and domestic investment ranked third.

The company's core products outperform the industry

The company attaches great importance to R&D. The R&D cost rate in 2023 is 9.8%. It relies on more advanced technology and more stable quality to enhance competitiveness and brand awareness, and its core products outperform the industry. 1) PLC: Industry CAGR = 6% in the past 5 years, company CAGR = 14%.

2) Servo system: industry CAGR = 8% in the past 5 years, company CAGR = 35%.

3) Human-machine interface: industry CAGR = 6% in the past 5 years, company CAGR = 8%.

2024 could be the inflection point of the company's profitability

The company's revenue has maintained positive growth since 2013, but net profit continued to decline from 2021 to 2023. The core reason is that the company's comprehensive gross margin continued to decline and the expense ratio continued to rise during the period. The decline in the company's net interest rate basically = decline in gross margin+increase in the period expense ratio. Comprehensive gross margin improved year-on-year starting in 2023H2 under measures to reduce overall demand and increase the cost and efficiency of servo systems. After offsetting the increase in the cost ratio during the first three quarters of 2024, net margin increased slightly by 0.1 pp. Looking forward to the future, when the company's front layout at both ends of R&D and marketing gradually gains strength, the cost ratio is expected to decline steadily during the period, and the net interest rate is expected to continue to rise and there is plenty of room. 2024 may be an inflection point in the company's profitability.

Profit forecasting and investment advice

We expect the company's 2024-2026 revenue to be 17.3, 20.7 and 2.48 billion yuan, respectively, +15%, +20%; 2024-2026 net profit to mother will be 2.3, 2.9, and 370 million yuan, respectively, +14%, +28%, and +27%; EPS for 2024-2026 will be 1.62, 2.07 and 2.63 yuan, respectively, and the 2024/11/18 share price of 34.68 yuan will be 21, 17 and 13 times PE. The company is a well-known domestic industrial control brand. Its core products outperform the industry, and there is plenty of room for long-term growth. First coverage, giving a “buy” rating.

Risk warning

The risk of macroeconomic fluctuations, the risk of increased industry competition, and the risk of fluctuations in raw material prices.