An established fruit chain leader that extends endogenously and horizontally. Established in 2004, Lixun Precision started with computer connectors to achieve vertical integration of the “parts-module-complete” industry chain through endogenous epitaxial extension, and its products gradually expanded from consumer electronics such as computers, mobile phones, and wearables to the automotive and communications fields. The company is deeply tied to Apple, expanding the business category of major customers and increasing its share, and the module & machine business has become the core driving force of consumer electronics; companies in the automotive electronics sector have gradually expanded from wiring harnesses to new energy/intelligent connectivity/smart cockpits, etc.; in the communications sector, the company adheres to the “core components+system-level products” strategy, covering leading customers such as Dell/Cisco/Inspo/H. The consumer electronics market grew steadily, and automotive electronics and communications contributed to new growth. In 2023, the company achieved net profit of 10.953 billion yuan, and the 2017-23 CAGR reached 36.5%. The 2024 mid-year report guidelines strengthened the certainty of annual growth. 24Q2 is expected to achieve net profit of 27.6-2.97 billion yuan, with a median value of 2.86 billion yuan, yoy +22.5%.
On the eve of the explosion of AI end-side applications, Apple AI is poised to go. The development trend of AI terminals such as AI phones and AI PCs is clear. At the end of February, Bloomberg revealed that Apple is canceling the electric vehicle development plan and is increasing AI research and development. 1) Apple AI layout: From the Core ML architecture to the Ajax framework, Ferret multi-modal large model, to the 30 billion parameter MM1 multi-modal model in early 2024, the innovative end-side model Realm, and the open source end-side model OpenELM, Apple AI big model development continues to advance; in terms of hardware, Apple has also made corresponding preparations. The A/M series chips all use a CPU+GPU+NPU architecture. The A17 Pro NPU computing power has been increased to 35 TOPS, and the M4 series chips will focus on AI functionality, NPU computing power is as high as 38 TOPS; in terms of external empowerment, since 2010, Apple has acquired 30+ AI startups to enable AI development. Additionally, Apple may introduce large third-party models such as OpenAI and Google to quickly enhance terminal AI capabilities. 2) Apple AI app prediction: Apple may launch iOS 18 from June 10-14 at WWDC2024, or upgrade AI features of native apps such as Siri, Album, Spotlight, Pages, Keynote, and iCloud, and launch an AI app store to provide dedicated AI apps. Furthermore, driven by Sora's big model, AI+Vision Pro has more room for imagination.
Major customers have strong business growth certainty, and AI enables medium- to long-term growth. The company is deeply bound to major North American customers, has in-depth cooperation and multi-dimensional layout on components, modules and complete machines, and has a high degree of certainty in business growth. As major customers increase their investment in AI in the future, Lixun is expected to benefit from a sharp rise in the volume and price of AI terminals, and even obtain more business opportunities in servers, electrical connections, and optical connections.
1) AI empowers terminals to boost sales: The productivity increase brought about by terminal AI is the key to stimulating user demand. AI performance directly affects terminal sales. Apple has a complete terminal product line and full-stack capabilities for chips, OS, and applications. It also continues to be deployed in the AI field. Combined with external AI cooperation and empowerment, it is expected to drive sales growth in multiple product lines. As a core supplier of complete machines and components for multiple product lines, Lixun is expected to benefit in the long term.
2) AI drives product value increase: As cloud AI extends to end-side AI, hardware devices such as chip computing/memory/cooling/acoustics/batteries will all usher in upgrades and changes, thereby boosting the value of components & machines. Lixun is expected to fully benefit as a consumer electronics leader.
3) The communication business is expected to obtain more business opportunities under the AI wave: The growing demand for global computing power infrastructure under the AI wave will bring more business opportunities to Lixun, including server ODM foundry, electrical connection (high-speed connector+copper cable), optical connection (optical module+AOC), heat dissipation (air cooling/liquid cooling), etc. In addition, the number of iOS users worldwide for major customers is 2 billion +, and the annual device sales volume + is 300 million units+. If all are connected to AI, the computing power demand for cloud training and end-side inference will continue to grow, and the AI business opportunities will continue to grow.
Investment advice: We expect the company to achieve operating income of 2617/3046/332.4 billion yuan in 2024-26, up 12.8%/16.4%/9.1% year on year; achieve net profit of 137/174/19.2 billion yuan, up 25.3%/27.1%/9.8% year on year, corresponding PE of 17.0/13.4/12.2 times, respectively, and 19.9 times the average PE of comparable companies in 2024. The company's valuation is lower than the industry average, and considering that the business growth of the company's major customers is highly certain. In addition, AI for major customers brings potential business opportunities, and the communications & automotive business is also expected to continue to grow, maintaining a “buy” investment rating.
Risk warning events: Demand for terminals falls short of expectations, AI development for major customers falls short of expectations, and there is a risk that public data used in research reports may lag behind or not be updated in a timely manner