Incidents:

Green Harmonics released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 356 million yuan, or -20.10%, and realized net profit of 84 million yuan, or -45.81% year on year; in 2024Q1, it achieved revenue of 82 million yuan, -7.45% year on year, and net profit of 0.2 billion yuan, or -18.39% year on year.

Demand for industrial robots is under pressure, and competition for harmonic products intensifies affecting profitability.

① In terms of revenue, due to macroeconomics in 2023, fixed asset investment in China's 3C and semiconductor industries slowed, and demand for industrial robots was sluggish. The annual production of industrial robots in China was 429,500 sets, -2.2% year-on-year, which affected the decline in the sales scale of the company's harmonic reducer products. In 2023, the company sold 21,500 units of harmonic speed reducers, -17.84% year-on-year.

2024Q1 China's industrial robot output was 120,300 sets, +4.9% year-on-year, and the monthly output in March was 50,600 units, +6.6% year-on-year. The industry growth rate changed from negative to positive. Demand in the industrial robot industry is expected to recover weakly throughout 2024, driving demand growth in the harmonic reducer industry.

② In terms of profit, the company's gross profit margin was 41.14% in 2023, -7.55pct year on year, mainly due to declining industry demand, increased competition, and the development period of some new products. Among them, the gross profit margin of harmonic reducers and metal components was 41.17%, -7.62pct year on year; the gross profit margin of mechatronic products was 41.03%, or -1.35% year-on-year. The company's net profit margin was 23.82%, -11.27pct year-on-year. The cost rate for the period was 16.34%, +1.62 pct year over year. Looking at the breakdown, the sales/management/R&D/finance expense ratios were 3.06%/6.18%/13.59%/-6.49%, respectively, compared with +1.74pct/+0.94pct/+3.3pct/-1.83 ct. This is mainly due to the company's continued high R&D investment and strengthened sales management.

③ In terms of cash flow, net operating cash flow in 2023 was 149 million yuan, an increase of 470.83% over the previous year, mainly due to a decline in sales and a decrease in cash for purchasing goods and receiving labor payments.

Strengthen the integrated product layout and expand new application scenarios. The company actively seeks emerging products other than harmonic speed reducers, and develops mechatronic products composed of next-generation speed reducers, high power density torque motors, and high-speed real-time servo drivers based on PCT international invention patents in response to the development needs of various industries such as high-end CNC machine tools, semiconductor processing equipment, medical equipment, and automation equipment in China. In 2023, the company's mechatronics business revenue was 34 million yuan, +30.78% year on year, and product sales volume was 5,699 units, +17.46% year over year. Mechatronic products can not only expand the application fields of the company's products, but also effectively increase the added value of products.

In addition, the company has also accelerated the application of the world's first liquid-controlled grinding and polishing tool products, and has established cooperation with leading customers in application scenarios such as casting polishing, additive surface modification grinding, weld polishing, and mold polishing.

Harmonic reducers are the core components of humanoid robots, and the company has sufficient reserves and production capacity. According to our robot series report - “Empowering AI, Accelerating the Humanoid Robot Industry, Seizing Beneficial Opportunities in the Industrial Chain”, the value of a harmonic reducer in a single robot is expected to reach 9,600 yuan under mass production assumptions, and there is plenty of room for growth. As a leading domestic harmonic speed reducer, the company has announced plans to establish a joint venture between Sanhua Intelligent Control and Tesla to develop harmonic reducer-related business. We expect that the company can benefit from the large-scale deployment of harmonic reducers brought about by mass production of humanoid robots through the mass production of humanoid robots. In 2023, the company completed the procurement of housing construction and related equipment for the production expansion project with an annual output of 500,000 precision speed reducers, and plans to complete the construction, commissioning and production work of related intelligent production lines within 2024, and reserve sufficient production capacity to cope with the volume of the industry.

Investment advice:

We expect the company's net profit to be 1.01/108/208 million yuan in 2024-2026, an increase of 19.5%/57.0%/31.9%, corresponding PE levels 199/127/96 times, respectively.

Considering the company's leading position in the harmonic reducer industry, mass production of humanoid robots is imminent, with a target price of 136 yuan for 6 months, corresponding to the 2024 PE 227X, maintaining the “Increased holdings - A” rating.

Risk warning: Investment in manufacturing is sluggish, robot promotion falls short of expectations, and market competition intensifies.