Key points of investment:

Incident: The company discloses its 2023 annual report and 2024 quarterly report. 1) The company achieved operating income of 1,258 million yuan in 2023, +40.65% year-on-year, and net profit to mother of 325 million yuan, +33.83% year-on-year. 2) In the single quarter of 2023Q4, revenue was 376 million yuan, +90.41% year-on-year, and net profit to mother was 86 million yuan, +51.7% year-on-year. 3) In the single quarter of 2024Q1, 24Q1 revenue was 368 million yuan, +30.23% year on year, net profit to mother was 87 million yuan, +34.95% year on year, after deducting net profit of 85 million yuan, +33.48% year on year.

Profitability remains steady. In 2023, the company's gross margin and net margin were 46.54%/26.7%, with year-on-year change of -0.66/-1.32pct; 23Q4 gross margin/net margin for a single quarter was 43.16%/22.68%, respectively, -7.55pct/-7.25pct, and -5.6pct/-6.84pct month-on-month, respectively. The gross margin/net margin for the 24Q1 single quarter was 45.63%/24.38%, respectively, -1.93pct/+0.49pct, and +2.46pct/+1.7pct month-on-month.

The overall control of the fee rate is good. 1) The cost rate for the 2023 period was 15.98%, with a year-on-year change of +0.28pct.

Among them, the sales/management/finance/R&D expenses ratio was 8.25%/4.96%-4.39%/7.16%, respectively, with a year-on-year change of +1.90/ -1.56/-0.57/+0.51 pct. Among them, the cost rate for the 23Q4 single quarter was 17.66%, a year-on-year change of -3.88pct. Among them, the sales/management/ financial/ R&D expenses ratio was 8.23%/2.39%/-1.34%/8.38%/, respectively, with a year-on-year change of 0.79/-1.8/-1.83/-1.04pct. 2) The fee rate for the 2024Q1 period was 16.66%, a year-on-year change of -1.39pct. Among them, the sales/management/finance/R&D expense ratios were 6.72%/5.65%/-2.16%/6.44%, respectively, with year-on-year changes of -0.89/0.19/0.39/-1.08pct.

Sales of equipment and ink increased steadily at the same time, and breakthroughs were achieved in the non-textile business. 1) By product: ① Digital printing equipment:

Revenue was 612 million yuan, up 32.44% year on year; sales volume: 841 units, +14.42% year on year, gross margin was 45.29%, year on year +1.74pct; ② Ink: revenue was 411 million yuan, up +8.17% year on year, sales volume 8265 tons, +21.06% year on year, gross margin was 53.87%, +2.10pct year on year, average ink price was 49.72 yuan/kg; ③ Automated sewing equipment: revenue was 105 million yuan, gross margin was 23.46%; ④ digital printing equipment: operating income was 23.46% At $63 million, gross margin was 44.14%. 2) By region: ① Export sales: Revenue was 672 million yuan, up +46.58% year on year, gross margin was 45.35%, -2.50 pct year on year.

② Domestic sales: Revenue was 581 million yuan, up +33.93% year on year, gross margin was 47.68%, +1.33pct year on year. 3) By sales model: ① Direct sales: Revenue was 921 million yuan, up +48.22% year on year, gross margin was 47.15%, -0.78 pct year on year. ② Distribution: Revenue was 331 million yuan, up 22.49% year on year, gross margin was 44.41%, -0.84 pct year on year.

Contract liabilities have increased dramatically, confirming that there are plenty of orders in hand. 1) The company's operating cash flow in 2023 was 157 million yuan, -12.35% year-on-year, and operating cash flow in the 23Q4 quarter was -03 billion yuan, -102.48% year-on-year.

The company's contractual liabilities in 2023 were 196 million yuan, +263.44% YoY. 2) The company's 2024Q1 net operating cash was RMB 36 million, -45.76% YoY; the company's 2024Q1 accounts receivable were RMB 455 million, +27.01% YoY; and the company's 2024Q1 contract liabilities were RMB 174 million, +13.46% YoY.

The company continues to deepen the “equipment first, consumables follow-up” business model. The increase in the company's digital printing equipment market has led to a continuous increase in the scale of ink sales. Looking forward to the future, 1) Production capacity continues to expand: The company's “intelligent factory with an annual output of 2000 sets of industrial digital printing equipment and consumables” has been officially put into operation, and the plant infrastructure work for the “intelligent production line with an annual output of 3,520 sets of industrial digital printing equipment” project has basically been completed. With the gradual completion and commissioning of the fund-raising project, the company's production capacity will expand to 5,520 units. At the same time, the company is preparing to build an intelligent ink production base in Tianjin. After it is officially completed and put into operation, the ink production capacity is expected to expand to 40,000 to 50,000 tons. 2) Open up the ink industry chain: The company has completed the share acquisition of Tianjin Jingli, further reducing ink production costs and further improving the company's ink pricing capacity. 3) Continued breakthroughs in the non-textile business, further opening up market space.

The company plans to introduce employee stock ownership plans to strengthen confidence in development. The company announced the 2024 employee shareholding plan. The employee's shareholding plan is no more than 865 million shares (0.72% of the total share capital), and the shareholding price is 51 yuan/share. The performance assessment goals are: net profit growth rate in 2024 is not less than 30% compared to the 2023 base figure (net profit for 24 years is not less than 423 million yuan), and the cumulative net profit growth rate for 2024 and 2025 is not less than 200% (net profit for 25 years is not less than 553 million yuan).

Profit forecasting and valuation.

1) Profit forecast. We expect the company to achieve operating income of 16.32/20.45/2,499 billion yuan in 2024/2025/2026, up 29.7%/25.3%/22.2% year on year; net profit to mother will be 4.24/5.30/ 656 million yuan, up 30.3%/25.1%/23.7% year on year.

2) Valuation. The company's industry is in the field of digital printing. It is the only digital printing equipment company among listed companies, and covers a complete industrial chain, involving equipment, consumables (ink), and textile (application).

Most of the other companies with similar downstream and industrial chains to the company are not listed or have consistent expectations. Considering the above situation, we selected Jack Co., Ltd. (industrial sewing machinery), Nastar (application of laser and inkjet printing consumables), and Shenzhou International (vertically integrated knitting manufacturer) as comparable companies. Considering that the company's industry is in a relatively early stage, the performance is growing rapidly and future development is more sustainable, and it is suitable for the PEG valuation method. Referring to the valuation of comparable companies, we gave the company a rating of “superior to the market” with PEG 1.20-1.25 times in 2024, corresponding PE of 35.64-37.13 times (comparable company's 2024 PE valuation is 19.24-31.73 times), a reasonable value range of 125.45-130.68 yuan/share (the company's EPS is estimated to be 3.52 yuan in 2024), and a reasonable market value range of 151-15.7 billion yuan.

Risk warning: The company's overseas market expansion falls short of expectations, the risk of core raw material nozzles mainly relying on outsourcing, raising capital to expand production capacity falling short of expectations, increasing the penetration rate of digital printing technology falling short of expectations, and the risk of fluctuations in downstream demand.