Matters:

The company released its 2023 annual report:

1) In 2023, we achieved operating income of 4.658 billion yuan (yoy +47.95%); net profit attributable to mother of 287 million yuan (yoy +119.46%); net profit after deducting non-return to mother of 275 million yuan (yoy +134.21%).

2) 2023Q4 achieved operating income of 1,430 million yuan (yoy +51.63%, qoq +2.94%); net profit to mother of 91 million yuan (yoy +505%, qoq +10.46%); net profit after deducting non-return to mother 84 million yuan (yoy +425%, qoq +1.66%).

Commentary:

2023 comes to an end with high growth results, and emerging businesses are emerging. The company's revenue in 2023 was 4.66 billion yuan, up 48% year on year, and net profit to mother was 287 million yuan, up 119% year on year. The company's revenue performance increased significantly, mainly benefiting from the all-round development of the business and overseas business layout: 1) With the continuous expansion of overseas customers, the company's data storage equipment brought new growth points; 2) In the smart IoT business, the company continuously optimizes the product layout and business model, continuously increases the sales share of high-value-added products, consolidates core customers, strengthens the development of new customers and research and application of emerging products, and enhances the company's overall profitability; 3) increasing the health product line and launching a series of smart home terminals and health indicator monitoring devices to produce good sales performance. Profitability increased significantly, mainly benefiting from falling prices of some raw materials and the effects of digital construction of intelligent manufacturing. The cost side continued to be optimized, and gross margin increased by 2.37 pct to 13.57% year-on-year.

Smart IoT terminals go overseas and are driven by cloud platforms, and the core target of edge AI is expected to be double hit by Davis. According to iResearch's forecast, China's AI+ security software and hardware market is expected to exceed 90 billion yuan in 2025. As sensing technologies and cloud platforms such as face recognition, gesture recognition, and risk analysis become more mature, IPC is expected to become an important entry point for AI at the edge of the whole house smart circuit, bringing massive growth opportunities, and the market size is expected to continue to rise. The smart home and smart wear market will also benefit from a steady rise in demand for terminal computing power. The company continues to implement the smart IoT hardware going+cloud platform strategy:

1) Continue to expand new customers to the global market and serve new quality productivity. The overseas market is the company's key driving area. In 2023, the company's smart IoT terminal business line continued to expand overseas markets. Overseas growth was rapid, and customer growth in some fields reached more than 60%. The company will use the advantages of smart security products, smart storage, health, and wearable products to actively expand various channels such as retail, e-commerce and telecom operators in various regions and countries, focusing on developing markets such as North America, Southeast Asia, and Europe. The company will also increase market promotion through various media and social platforms, actively participate in relevant exhibitions held in various countries and regions, and continue to expand the influence of products overseas.

2) Deeply cultivate the cloud service business and strive to become the world's leading comprehensive cloud service platform. The company relies on big data, cloud computing, artificial intelligence and other technologies to provide comprehensive cloud services. Change traditional video software and hardware integration solutions, decoupling hardware, algorithms, data, and applications, support multi-terminal access, and provide customized equipment development. In addition to completing equipment network addition and intelligent control, it also provides cloud services such as alarm services and push services. The “Co-Creation Cloud” has been deployed globally to intelligently select the optimal path based on the user's geographical location. In 2023, the company's video smart terminals based on video cloud services continued to grow, and video cloud service subscriptions generated sales performance. In the future, the company will strive to enhance the basic capabilities of the cloud platform and enhance the core competitiveness of the company's own products in terms of cloud services, private computing, dynamic algorithm loading, “cloud+edge+end” visual understanding and Chat GPT linkage.

A leader in the domestic server remanufacturing circuit, fully enjoys the dividends of innovation and development in the AI era. Server remanufacturing includes server recycling, disassembly, R&D, production, sales, and maintenance services. Demand for computing power is driving the wave of AI infrastructure, accelerating cloud service vendors to upgrade their data center networks or servers to upgrade computing power equipment, and demand for server remanufacturing continues to improve. The company successively set up Shenzhen Yantian Branch and Bonded Division in the second half of 2023 to carry out server remanufacturing business. Overseas recycling of servers requires multiple qualifications, and companies with early layout are expected to gain a card position advantage; rely on strong supply chain management advantages to achieve large-scale production of server remanufacturing; and rely on high R&D investment and technological development to achieve a high profit rate of the whole machine and create a core competitive advantage.

Expand the layout of the storage industry chain to welcome the new AIGC era. The company continues to increase investment in R&D, continuously launch high-performance and high-reliability storage and server products, enhance the R&D and sales capabilities of high-computing servers, and restart the DDR particle business through server remanufacturing. At the same time, it will launch a next-generation distributed storage system to meet the new requirements for storage systems in the AI era with higher I/O performance and lower latency. The company always insists on being driven by independent innovation, consolidating product competitiveness through self-developed main control chip+firmware solutions+sealing and testing, and strives to achieve an upward extension of the vertical storage product industry chain and optimize the profit model. The company will seize AI PC development opportunities, strengthen business cooperation with major customers, and continue to increase market share; at the same time, it will upgrade and develop from the consumer market to the industrial grade, automotive electronics market, server and data center cloud storage, and high-end solid-state drive and memory stick markets, and actively reserve and lay out advanced AI technology based on the data storage business, and aim to become an internationally influential memory solution provider.

Investment advice: The global storage/consumer electronics market is recovering. The company is benefiting significantly from the growth in demand for storage and IoT smart terminals and servers. According to the annual report, we raised the profit forecast. According to the annual report, we expect the company's revenue to be 72.49/95.90/11.695 billion yuan (the original value for 2024-2025 was 59.4/7.30 billion yuan), and net profit to mother was 6.02/8.28/10.94 billion yuan (the original value for 2024-2025 was 5.05/6.48 billion yuan) 100 million yuan), corresponding EPS was 2.47/3.40/4.49 yuan (the original value in 2024-2025 was 2.07/2.66 yuan). For reference, comparable companies gave the storage business/IoT smart terminal business 50/22x PE in 2024, corresponding to a target price of 85.73 yuan, maintaining a “strong promotion” rating.

Risk warning: technological innovation falls short of expectations, global business risk, raw material price fluctuation risk, cloud service business development falls short of expectations, server remanufacturing business development falls short of expectations