Key points of investment:

New energy has enabled the traditional stamping parts business, increasing the revenue scale and gross margin level. Established in 1989, Wuxi Zhenhua changed its name to Zhenhua Accessory Factory in 1995. Its main business is automotive stamping parts. After years of development, the company is an important supplier of stamping and welding parts for SAIC Motor Group. Since 2017, it has actively expanded new energy customers. It has developed key customers such as Tesla, Ideal Auto, Xiaomi, and Zhiji Auto, and has formed new incremental points. Along with the increase in revenue, raw material prices declined after the pandemic, and profit margins also benefited. We predict that the revenue scale and gross margin level of the stamped parts business will grow rapidly as the number of new customers is released and the price of raw materials falls.

Relying on strong exports from the core customer SAIC Motor Group, revenue from the split assembly processing business increased. Split assembly processing is a process of welding and other processing of stamped parts and standard parts. It is equivalent to “mainly manufacturing to earn process costs”; therefore, the business has a high gross margin and is not affected by fluctuations in raw material prices. Due to years of cooperation between the company and SAIC Motor Group, it supplies SAIC passenger cars (Roewe and MG brands), which are mainly located at factories in Zhengzhou and Ningde. In H1 in 2023, the company's business output accounted for 79.5% of SAIC's passenger car production, and the value of bicycles increased from 568.5 yuan in 2018 to 692.8 yuan in 2022, increasing year by year. Driven by SAIC Motor's strong exports and growing market share of its own brands, the business is expected to maintain steady growth; at the same time, combined with the business's high gross margin and net interest rate, it will become an important source of profit for the company.

The acquisition of the precision electroplating business opened the company's second growth pole. The company completed the acquisition of all shares in Wuxi Kaixiang in 2023 and added precision electroplating business. Wuxi Kaixiang also entered this circuit in 2012 in the process of seeking localization in line with the joint electronic precision electroplating business, laying out research and development ahead of time. After the sample was approved by Bosch in Germany in 2014, the customized production line began preparing for mass production; starting in 2016, the Wuxi Kaixiang production line officially mass-produced and supplied joint electronics.

The business industry has high barriers and an excellent competitive pattern, with a gross margin of up to 80%; 2023H1, the subsidiary achieved revenue of 58.5888 million yuan, net profit of 32.8373 million yuan, and a net interest rate of 56%. We predict that with the resources and platforms of listed companies, the precision electroplating business is expected to expand new business lines and customers in the future, becoming the company's second growth pole.

First coverage, giving a “buy” rating. The company's traditional business continued to grow with SAIC Motor and new energy customers such as Tesla, Ideal, and Xiaomi, and the new electroplating business opened a second growth pole. The company is expected to generate revenue of 22.9/30.8/4.20 billion yuan in 2023-2025, with a year-on-year growth rate of 31.1%/34.5%/36.2%; net profit to mother of 2.76/3.70/490 million yuan, a year-on-year growth rate of 240.8%/34.0%/32.5%, corresponding to the previous (2024/4/9) PE 21/16/12 times. Referring to comparable companies, they were given 19 times PE in 2024, corresponding to a target market value of 7.1 billion yuan, with room for 23% increase. For the first time, coverage was given a “buy” rating.

Risk warning: downstream customer sales fall short of expectations, customer development falls short of expectations, rising raw material prices, etc.