The 2023 results fell short of our expectations, and the 1Q24 results met our expectations
Xinwei Communications announced 2023 results: operating income of 7.548 billion yuan, down 12% year on year; net profit to mother of 521 million yuan, down 20% year on year, lower than our expectations. Corresponding to the 4Q23 single quarter, Xinwei achieved operating income of 1,954 billion yuan, a year-on-year decrease of 19%, and net profit to mother of 0.4 billion yuan, a year-on-year decrease of 91%. We believe that the main reasons for the pressure on Xinwei 4Q23 are: 1) weak demand for terminal products and a year-on-year decline in customer orders; 2) 4Q23 Xinwei has expenses in R&D and management, which is dragging down profits.
Meanwhile, Xinwei Communications announced 1Q24 results: operating income of 1,888 billion yuan, up 7% year on year, and net profit of 152 million yuan, up 4% year on year, basically in line with our expectations.
Looking specifically at 2023, Xinwei's gross margin increased by 0.3ppt to 22.1% year on year, and R&D expenses increased by 0.9ppt to 8.6% year on year. The company continued to deepen its one-stop “material → component → module” capability to provide customers with high-quality solutions. Sales and management expenses increased 0.1/0.5ppt to 0.8/4.7% year on year, respectively, and net interest rate decreased 0.6 ppt to 6.9% year on year.
Development trends
Focusing on R&D investment, LCP's one-stop service capability is leading the industry. According to the company's annual report, by the end of 2023, Xinwei had applied for a total of 4138 patents and received the 2023 Guangdong Patent Award for antenna units, MIMO antennas and handheld devices. Xinwei attaches importance to basic materials and basic technology research and development. Through continuous high-intensity research investment in core material fields such as magnetic materials, polymer materials, ceramic materials, and functional composites, Xinwei enhances the competitiveness of solutions such as radio frequency connectivity, wireless charging, and high-speed interconnection. In terms of LCP and millimeter-wave antenna modules, the company has continuously strengthened its one-stop capabilities of “LCP materials → LCP parts → LCP modules”. The self-developed LCP film and LCP high-frequency FCCL have passed the US UL certification. The high-frequency transmission performance and reliability are at the leading level in China, and have served major customers in North America. We are optimistic that Xinwei's LCP business will continue to grow in the future.
Deepen connector capabilities and accelerate development into fields such as automobiles and commercial satellites. Recently, many countries around the world have begun construction of commercial satellite communication projects. Among them, low-orbit satellites are one of the most promising satellite mobile communication technologies. According to the company's annual report, Xinwei has successfully supplied major customers in North America. We believe that in the future, we can expand into more large manufacturers and drive the continuous growth of related revenue. In addition, Xinwei has also made breakthroughs in automotive connectivity. Currently, it has obtained Tier 1 supply qualifications from domestic and foreign OEMs, and growth can be expected.
Profit forecasting and valuation
Due to weak downstream demand, we lowered Xinwei Communications 2024e EPS by 29% to 0.71 yuan and introduced 2025e EPS by 0.89 yuan. The current stock price corresponds to 2024/25e 25.6/20.4x P/E. Considering the promising potential of Xinwei's satellite communications layout, we maintained our ranking to outperform the industry and simultaneously lowered the target price by 30% to 21.0 yuan, corresponding to 2024/25e 29.6/23.7x P/E, corresponding to the current 16% increase.
risks
Demand for consumer electronics is weak; the development of new fields such as commercial satellites and automobiles falls short of expectations.