2023&1Q24 results fall short of our expectations

The company announced 2023 &1Q24 results: revenue of 23.236 billion yuan in 2023, +17.85% year over year; net profit to mother of 1,028 billion yuan, +4.37% year over year. Corresponding to 4Q23 revenue of 6.829 billion yuan, +20.64%/+10.20% YoY; net profit to mother was 189 million yuan, -2.16%/-42.30% YoY. 1Q24 achieved revenue of 5.684 billion yuan, +22.59%/-16.77% YoY; net profit to mother was 223 million yuan, +11.90%/+18.37% YoY. The 2023 and 1Q24 results fell short of our expectations as gross margin fell short of our expectations.

Development trends

The interior business consolidates the foundation of performance, and superimposes customer structure optimization to help steady revenue growth. The company's steady revenue growth in 2023 is mainly due to: 1) The core business interior base is stable. In 2023, interior/exterior/metal/electronics revenue was +30.8%/+7.9%/+11.0%/+12.4% to 114.8/36.7/52.32 billion yuan, and interior parts accounted for +4.9ppt to 49.4% year-on-year. 2) The customer structure continues to be optimized. The company's top five customer revenue accounts for -6ppt to 37.8% year-on-year in 2023 (all adjusted to 23 revenue and customer caliber). Looking ahead, we believe that as an interior leader, the company continues to develop own-brand customers, revenue from NEV companies is expected to increase further, and the certainty of medium- to long-term growth will increase.

Overseas production capacity is climbing and loss reduction continues to advance, and product platformization is being actively built. In 2023, the company's gross sales margin was +0.02pct year-on-year to 17.02%. The lower gross profit increase was mainly due to a decline in mass production of new European projects.

In 2023, the gross margin of interior/electronic parts was +0.1pp/+4.0ppt to 15.5%/25.5% year-on-year. The profit of interior parts was strong, and electronic parts may be a profit growth point. In 2023, R&D investment was +15.6% to 820 million yuan, mainly electric spoilers, in-panel atmosphere lights, etc. Furthermore, the company is concerned about shareholder returns, with a cash dividend of 0.632 yuan per share in 2023. We believe that with European production capacity climbing, loss reduction in North America, and continuous investment in R&D, the company's product platformization capabilities have improved, and there is still plenty of room for growth in profitability.

The regional layout is structured and adjusted, resources are integrated, or new development opportunities are ushered in. In terms of production capacity layout, the company formed a long-term strategy of “expanding North America, shrinking Europe, and stabilizing China”. Domestically, the company has built new production bases in Lingang, Hefei, and Shenyang in recent years to absorb and utilize existing production capacity by continuously receiving orders from new energy customers; on the foreign side, the company has production bases in Europe, North America, Southeast Asia, etc., and plans to adjust Mexico and Romania to the strategic focus of North America and Europe. Looking ahead, we believe that the company's structural optimization may bring new opportunities for growth.

Profit forecasting and valuation

Due to gross margin adjustments, we lowered our 2024 net profit by 5.0% to $1,338 million, and introduced a profit forecast of $1.53 billion for the first time in 2025. The current stock price corresponds to 8.2/7.1 times P/E for 2024/2025.

Maintaining an outperforming industry rating, we lowered our target price by 9.7% to 15.80 yuan, which corresponds to 9.6 times the 2024 price-earnings ratio and 8.4 times the 2025 price-earnings ratio, with 17.7% upside compared to the current stock price.

risks

New business expansion fell short of expectations, and overseas reversal of losses fell short of expectations.