Dechang Co., Ltd. released its 2023 annual report. During the reporting period, the company achieved revenue of 2.8 billion yuan, +43.2% year-on-year; net profit to mother was 320 million yuan, +8% year-on-year. Among them, in Q4, the company achieved revenue of 650 million yuan, +60% year over year; net profit to mother of 60 million yuan, +65% year over year. 24Q1 revenue of $8.2 billion, +46% YoY, net profit to mother of 85 million yuan, +102% YoY

Home appliances grew steadily, and business demand returned to stability. The company's home appliance business achieved revenue of 2.48 billion yuan, +39% year over year, of which vacuum cleaners achieved revenue of 1.63 billion yuan, +18% year over year, and other small household appliances achieved revenue of 8.2 billion yuan, +117% year over year. The impact of inventory removal from the original strategic customers has basically come to an end, and business demand has resumed steady growth; the increase in orders from the new strategic customer SharkNinja will continue to deepen in the future; the company continues to enrich the reserve product lineup, open up market space in new fields, and the overall home appliance business is growing steadily.

The auto parts business rapidly expanded and continued to gain new targets. The auto zero business achieved revenue of 200 million yuan, +172% year-on-year, and achieved break-even throughout the year. Nexteer's project expanded from domestic to European and North American markets, and mass production was implemented in Europe; cutting-edge technology one-box, EMB, and SBW continued to be developed in cooperation with customers, and some passed verification and mass production. The auto parts business continues to grow rapidly and is expected to be profitable in the future.

Customer and product expansion+scale effect, profitability continues to increase. Q4 gross margin reached 21.7%, +2.6 pct year-on-year, showing the effects of introducing new customers and products, normalizing the cost reduction of the integrated supply chain system, and the scale effect of the auto zero business. In terms of the cost ratio for the period, sales/management/R&D/finance expenses rates were 0.5%/4.8%/4.7%/-0.2%, respectively, -0.2/-0.5/-0.3/ +3.3pct, respectively. The overall control was better; changes in financial expenses were mainly due to a year-on-year decrease in exchange earnings. Q4 net profit +65% year over year, mainly due to revenue side growth. Net interest rate reached 9.1%, +0.3 pct year over year. The 24Q1 sales/management/R&D/finance cost rates were 0.3%/4.6%/3.3%/-1.8% respectively, with significant changes in the financial expenses ratio (-1.9pct).

Participated in the establishment of a joint venture to lay out a humanoid robot circuit. The company plans to cooperate with five product-related enterprises to jointly build the Guangdong Humanoid Robot Innovation Center and establish “Shenzhen Humanoid Robot National Innovation Center Co., Ltd.” as the actual operating carrier of the innovation center. The joint venture has a registered capital of 65 million yuan, of which the company invests 5 million yuan, with a shareholding ratio of about 7.7%. At the Innovation Center, the company mainly undertakes technology research and development in fields related to humanoid robot motors, undertakes scientific research tasks assigned by the country, provinces and cities in this field, is mainly responsible for the Innovation Center's “Structure and Drive Research Institute”, and provides high-end talents and expert support in the field of humanoid robot motors. We believe that based on technology accumulation in the field of automotive motors, the company's entry into the humanoid robot circuit will help open up a wider market space in the future.

Investment advice: We expect the company to achieve net profit of 4.1/55/ 720 million yuan respectively on 24-26, or +28%/+32% year-on-year. The current stock price corresponds to PE valuations of 19/14/11 times, respectively, to maintain a “highly recommended” investment rating.

Risk warning: Overseas demand falls short of expectations, large fluctuations in exchange rates and raw material prices, etc.