Matters:
The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 2.33 billion yuan, +32% year on year, net profit of 159 million yuan, +82% year on year, after deducting non-net profit of 156 million yuan, +1.4 times year on year. 1Q24 achieved revenue of 60 billion yuan, +32% year over year, net profit of 58 million yuan, +95% year over year, deducted non-net profit of 42 million yuan, +51% year over year.
Commentary:
1Q24 revenue was in line with expectations. The 1Q24 company achieved revenue of 60 billion yuan, +32%/-18% year-on-month. The month-on-month sales volume mainly relied on sales volume from major customers to show revenue resilience.
The 1Q24 deduction of non-net profit benefited from lower raw material prices than expected, and gross margin stabilized under annual downward pressure. The 1Q24 company achieved net profit of 58 million yuan, +95%/+13% year over month, net interest rate of 9.8%, +3.1 PP/+2.6PP compared to month, deducted non-net profit of 42 million yuan, and +51%/-15% year on month, specifically:
1) Non-financial: RMB 16 million, of which government grants amounted to RMB 19 million, a year-on-year increase of +0.19 million yuan/month-on-month +0.15 billion yuan. The preliminary figures were announced on 3/29 of last month;
2) Gross profit margin: 24.7%, +1.3PP/ -3.2PP compared to the same period. It is estimated that 4Q23 included some rare earth compensation in gross profit and 1Q24 did not. 1Q revenue was -18% month-on-month, so the scale had a negative impact, and the annual decline in major customers also had a certain impact, but NdFeB rare earth prices were -40%/-15% month-on-month, hedging the decline in gross margin to a certain extent.
3) Period rate: 16.9%, +1.2PP/+1.4PP, of which the financial rate is 1.5%, +2.0PP/+1.3PP, where the 1Q median price of RMB appreciated 2.3% against the euro; 4) Impairment: 4Q23 impairment combined loss of 36 million yuan, 1Q23 was a profit of 0.04 billion, corresponding to the net interest rate of 5.6PP.
The company's core investment points are market expansion, ASP upgrading, domestic substitution and business model transformation:
1) Car speakers are continuously being added along with consumer upgrades, thereby driving the expansion of the industry. Shangsheng has a global market share of about 13%, with the largest domestic share, reaching 13.1% in 2023. The long-term sales volume is expected to rise from close to 80 million units to 100 million units +.
2) High-end acoustic systems were launched, and the company became a pioneer in domestic replacement and promoted industry trends. The company has now achieved full support for NIO. In the early stages, it has obtained new acoustical system targets from car companies such as NIO, Ideal, Zero Run, and Huawei Jinkang. It is expected that customers and projects will expand further in the future.
3) With product upgrades, the business model is expected to change, and barriers and ROE are expected to increase. The company's products/business ranges from speakers to acoustic systems to tuning, and the value is increasing. The business model is changing accordingly, from single component manufacturing to system component manufacturing, to human service. Barriers and return on investment are expected to change accordingly. It is currently a rare three-stage development enterprise in the domestic auto parts industry. Following the direction of evolution, we expect the net interest rate of the company's products to be raised from 6-7% to 10% +, and ROE is expected to increase further by around 10%.
Investment suggestions: Consumption upgrades and industry competition drive the upgrading and expansion of the automotive acoustics market. The company's speaker and acoustic systems business has been supported by impressive new projects, tuning services are expected to break through, and the performance and business model have ushered in positive changes. According to the 2023 annual report, the 2024 quarterly report, and the target volume expectations of new energy customers, we adjusted the company's 2024-2025 net profit forecast from 208 million yuan and 256 million yuan to 233 million yuan and 300 million yuan, and introduced the 2026 net profit forecast of 374 million yuan, corresponding growth rates of +47%, +28%, and +25%, corresponding to the current PE 20 times, 16 times, and 12 times the current PE. Based on the company's historical valuation, current sector valuation, and performance expectations brought about by rolling orders, we adjusted the company's target PE for 2024 from 30 times to 25 times, and the target price to 36.5 yuan accordingly. Maintain a “Recommended” rating.
Risk warning: Automobile production and sales fall short of expectations, acquisition of new power amplifier projects falls short of expectations, increases in raw materials and freight prices, RMB appreciation, etc.