Key points of investment

Honghua Mathematics achieved revenue of 1.258 billion yuan, yoy 40.65%; net profit to mother of 0.325 billion yuan, yoy 33.83%, after deducting non-return net profit of 0.312 billion yuan, yoy 32.35%. 2023Q4 revenue was 0.376 billion yuan, yoy 90.41%; net profit due to mother 0.086 billion yuan, yoy 51.7%; net profit after deducting non-return to mother 0.081 billion yuan, yoy 57.56%. 2024Q1 revenue was 0.368 billion yuan, yoy 30.23%, net profit attributable to mother 0.087 billion yuan, yoy 34.95%, net profit not attributable to mother 0.085 billion yuan, yoy 33.48%.

Cost and expense side: Net interest rate improvement+scale effect further reduced, and profitability increased quarterly on the gross profit side: 2024Q1 gross profit margin was 45.63%, -1.93pct year over year, up 2.46pct month-on-month; net profit margin 23.48%, 0.82pct year on year, 0.63pct month-on-month increase; net interest rate without return to mother 23.00%, 0.56pct yoy, up 1.54 pct month-on-month.

Expense side: The total cost rate during 2024Q1 was 16.66%, -1.39pct year on year; of these, sales/management/R&D/finance expenses were 6.72% /5.65/ 6.44%/-2.16%, respectively, with a year-on-year change of -0.89/0.19/ -1.08/0.39pct.

The cost ratio has been reduced, mainly due to significant optimization of sales and R&D cost rates.

The product structure is diversified, and the room for growth continues to open up

The scale effect of ink is prominent, and production capacity continues to be released: the company deepens the “equipment first, consumables follow-up” business model, increases investment in ink production lines, completes the acquisition of Tianjin Jingli, opens up the entire industry chain of active ink raw material synthesis, purification and ink formulation, and is expected to expand production capacity to 0.047 million tons. The ink revenue growth rate reached 8.17% in '23, accounting for 32.66%. The unit price remained at 0.5 million yuan/ton, and the gross margin increased by 2.1 pct.

Advanced pan-industrial digital printing has achieved significant gains: digital printing equipment and automated sewing were added to the list, contributing a total revenue of 0.169 billion. At the same time, the gross margin of digital printing equipment was 44%, which was an impressive performance.

The growth rate of domestic sales picked up, and gross margin increased dramatically: the domestic sales growth rate reversed to 34%, gross margin increased by 1.33 pct year on year, and the domestic penetration rate of digital printing machines further increased.

The employee stock ownership plan was implemented, and the assessment goal was to show long-term growth confidence. The company released the 2024 employee shareholding plan (draft). The participants in this shareholding plan were no more than 82 directors, supervisors, middle and senior management, and core technology, including no more than 8 directors and supervisors. The price to buy back the company's shares was 51 yuan/share, and the total amount was no more than 44.115 million yuan. The assessment year is based on 2023: in 2024, net profit increased by no less than 30%; in 2025, total net profit growth of 2024+2025 is not less than 200%. Taking profit as the core, stabilizing the company's management and professional talent team, fully demonstrating the management's confidence in the company's high growth.

Profit forecasting and valuation: maintaining a “buy” rating

The penetration rate of digital printing equipment is at a low level, and the company is expected to fully enjoy the penetration dividends as a leading domestic digital printing equipment company. The company has a high degree of industrial chain coverage and technical and cost advantages. The company's revenue is expected to be 1.657/2.192/2.897 billion yuan in 2024-2026, up 31.70%/32.27%/32.19% year on year, and net profit to mother 0.428/0.558/0.725 billion yuan, up 31.57%/30.33%/30.01%. The corresponding PE is 31.54/24.20/18.61 X, maintaining the “buy” rating.

Risk warning

Exchange rates and freight rates fluctuate; downstream demand falls short of expectations.