Focus on VR/AR/gaming business and margin recovery in FY24/25E

歌尔股份(002241)
    Following a challenging 2023, we expect AI-driven upgrade and AR/VR productlaunches will boost revenue and profitability recovery in FY24E, and impact ofshare loss of the major TWS project should normalise in 2H24E. In the longerterm, we believe Goertek will continue to benefit from AR/VR secular trend withmore product launches from major players such as Meta, Sony, Google,Samsung and Huawei. For FY23, revenue/earnings decline of -6%/-38% YoYwas mainly dragged by TWS order loss and weak VR/AR demand, but we areencouraged by continued GPM recovery in 4Q23 (10.6% vs. 7.7%/10.1% in2Q/3Q23). To reflect FY23 results and gradual recovery in FY24/25E, wetrimmed FY24/25E EPS by 9%/11% and adjusted TP to RMB17.56, based onsame 25x FY24E P/E (7-yr hist avg). Maintain BUY.
    2024/25 Outlook: Riding on “AI+XR” trend, PS5/Quest 3 ramp-up andmargin recovery. For 2024, we are positive on shipment momentum ofPS5/Quest 3 and stabilised hearable product segment, and we also believeApple’s Vision Pro and edge-AI trend will accelerate AR/VR/XR productcycle, benefiting Goertek as a global AR/VR/XR OEM leader. In 2024/25, weexpect AR/VR/XR product pipeline will come from major players such asMeta, Sony, Google, Samsung and Huawei. Overall, we expect acousticsprecision component and smart products segment (gaming, AR/VR) willrebound 4%/9% YoY in FY24E (vs -7%/-7% in FY23), while hearableproducts (AirPods, Android TWS) will drop 22% YoY in FY24E. GPM willrecover to 10.5%/10.5% in FY24/25E (vs 8.9% in FY23E), given improvingutilization and hearable product margin recovery.
    FY23 earnings bottoming with 4Q GPM recovery. FY23 sales/net profitdecline of 6%/38% YoY were mainly impacted by TWS share loss andVR/AR demand weakness, but we are positive on improving 4Q GPM to10.6% (vs. 7.7%/10.1% in 2Q/3Q23), backed by better utilization and costcontrol. In 2H23, precision components/hearable products/smart productsegments posted -6%/+10%/-23% YoY, and GPM recovered to20.4%/8.4%/8.7% in 2H23 (vs. 20.6%/4.1%/5.9% in 1H23).
    Maintain BUY. We think AR/VR technology leadership and product roadmapin TWS/XR/acoustics/gaming segments will enable it to benefit from industryrecovery and new MR product cycle in FY24/25E. Maintain BUY withlowered TP of RMB 17.56. Upcoming catalysts include new XR productlaunches and continued margin recovery

Firmly implement the globalization strategy

迈瑞医疗(300760)
    Bloomberg reported (15 Apr) that the European Union is set to launch an IPIinvestigation into China’s procurement of medical devices, seeking to addressconcerns about the policy’s unfair favouritism towards domestic suppliers in China.According to anonymous sources, the investigation could be announced as earlyas mid-April and may result in restricting Chinese companies’ access to tenders inthe EU. In May 2023, the US-European Union Trade and Technology Council(TTC) issued a statement indicating that the US and EU were exploring possiblecoordinated actions to address China’s non-market policies and practices.
    The International Procurement Instrument (IPI) regulation acts as a newtool to tackle market protection in public procurement by third countries.Under the IPI, the European Commission can initiate an investigation into anon-EU country’s practice if it recurrently undermines EU companies’ accessto its procurement market. Upon initiation, the Commission will invite the thirdcountry concerned to enter into consultations and seek to eliminate or remedyany restrictive practices. The investigation can be suspended at any time if thethird country takes satisfactory corrective actions. Otherwise, the EuropeanCommission will adopt an IPI measure in the form of a score adjustment or anexclusion of tenders. The IPI measure applies to procurement contracts of atleast EUR15mn for works and concessions, and EUR5mn for goods andservices, which expires after 5 years but may be extended for a further 5 years.
    The IPI regulation allows room for mediation. China is an importantmarket for global medical device players. Revenue from China accountedfor 13% of Siemens Healthineers’ total revenue in FY23. Moreover, a majorityof medical device MNCs have established factories in China and complied withthe identity of domestically-produced medical devices which enables them toaccess to China’s government procurements. Therefore, we believe that theprimary objective of the IPI investigation is to foster reciprocal access tointernational markets, rather than incurring losses for both parties involved.Given that the investigation can extend up to nine months, or even 14 monthsunder justifiable circumstances, there remains a degree of uncertaintysurrounding the outcome of the IPI process.
    Limited impact on Mindray’s business. Mindray’s revenue from Europeaccounted for 5.9% of its total revenue in 1H23, which is relativelymodest. Additionally, Mindray does not hold any individual EU tenders withcontract values exceeding EUR5mn. Furthermore, markets outside of Europeand America account for a significant portion of global medical device demand;for instance, Siemens Healthineers' revenue from regions outside the US andEMEA constituted 33% of its total revenue in FY23. Consequently, we believethat there is considerable potential for Mindray to further expand its businessin markets beyond America and Europe.
    Maintain BUY. We maintain our TP of RMB383.43 based on a 9-year DCFmodel (WACC: 9.0%, terminal growth rate: 3.0%).

做难的事，做对的事

联影医疗(688271)
    联影医疗成立于 2011 年，是中国大型医疗设备的龙头企业， 产品线覆盖 CT、 MR、MI、 RT、 XR 以及生命科学仪器。 2019-2023 年公司收入年复合增长率达 39.9%。 我们预期公司将受益于中国医疗设备市场扩容及国产替代，同时将持续开拓海外市场。
    深厚技术实力积累， 大型医疗设备高端市场的破局者。 中国大型医疗设备高端市场长期由进口品牌垄断，国产份额较低。联影医疗长期保持高研发投入， 9M23研发费用率达 18.4%。 经过多年研发累积，公司不仅建立了从低端临床到高端科研全覆盖的大型医疗设备产品矩阵， 更持续实现技术突破。我们认为，在部分高端设备领域，联影医疗已跻身国际一流， 乃至引领全球高端医疗设备的发展。 性能方面， 联影医疗的高端 CT、 MR 和 PET/CT 已看齐全球龙头 GE 医疗、飞利浦和西门子医疗 (“GPS”) 的高端产品。 创新突破方面，联影医疗已推出多款“行业首款”超高端设备，如行业首款 75cm 超大孔径 3.0T MR、行业首款可用于全身检查的超高场强 5.0T MR、行业首款具有 4D 全身动态扫描功能的 PET/CT 和行业首款诊断级 CT 引导的一体化直线加速器。
    国内市场持续扩容，中高端市场大有可为。 与海外地区相比， 中国大型医疗设备的人均保有量较低， 中国大型医疗设备市场具备较高成长空间。 根据医工研习社和 OECD 的数据，截至 2021 年底，中国 CT、 MR 和 PET 设备的人均保有量分别为每百万人 34 台、 9 台和 0.6 台，而美国人均保有量分别达到每百万人 43 台、38 台和 5.8 台。此外， 配置证管理的放松、配置证数量的大幅增加以及国务院推动设备以旧换新行动方案的出台都将有效地刺激国内大型医疗设备需求的释放，带动国内中高端医疗设备渗透率的提升，国产龙头联影医疗有望优先获益。
    高举高打加速全球化布局，出海潜力逐渐释放。 2019-2022 年，公司海外收入的年复合增长率达 121.8%，海外收入占比由 3.3%提升至 11.7%。 9M23 公司实现海外收入 10.3 亿元，同比增长 39.7%，海外收入占比进一步上升至 13.8%。联影医疗秉持高举高打的出海战略，利用差异化的创新产品持续突破海外高端市场，高端设备 uCT 960+、 uEXPLORER、 uMR Omega、 uPMR 790 等陆续进驻海外大型医院和研究机构。公司 9M23 的海外收入中，欧美成熟市场占比 47.0%，亚太市场占比 46.8%，海外收入来源分布均衡。我们认为，借助出色的产品力，随着公司全球化运营体系的搭建完善，公司海外业务将持续高速增长。
    首次覆盖给予“买入”评级，目标价 161.42 元人民币。 2023 年，联影医疗实现收入 114.1 亿元，同比增长 23.5%；归母净利润 19.7 亿元，同比增长 19.2%。 我们预计 2023-26 年公司收入和归母净利润将分别实现 25.7%和 24.4%的年复合增长，基于 9 年的 DCF 模型，给予 161.42 元人民币的目标价（WACC: 9.3%， 永续增长率: 4.0%） ，对应 55 倍 2024 年 P/E

Expect business rebound in 2024E

泰格医药(300347)
    Tigermed reported 2023 revenue of RMB7,384mn, up 4.2% YoY, and attributablerecurring net income of RMB1,477mn, down 4.1% YoY. Revenue/ attributablerecurring net income missed our forecast by 2.9%/ 12.1%, respectively, mainlydue to shrinking COVID vaccine revenue, slowdown in global R&D activities,and contracted margins stemming from temporary pricing adjustments coupledby relatively lower lab facility utilization. New orders signed in 2023 amountedto RMB7.85bn, down 18.8% YoY, mainly due to ~RMB1.2bn reduction of COVIDpass-through orders. Nonetheless, the total backlog experienced a mild uptickof 2.1% YoY, reaching RMB14.1bn by the end of 2023, which provides a solidfoundation for sustainable growth. Management has observed early indicatorsof a demand resurgence and anticipates that both revenue and attributablerecurring net income will achieve mid-teen growth in 2024E, signaling a robustrecovery from the previous year.
    Early signs of demand recovery. Tigermed experienced heightenedvolatility in client demand in 2023 due to subdued global biotech funding andescalating competition in the clinical CRO market. However, managementhas observed a positive shift in macro sentiment since late 2023, withbiopharmaceutical funding in China exhibiting a significant sequentialrebound. In Jan-Feb 2024, Tigermend’s new orders regained double-digitgrowth, particularly in the US and Australian markets, according to themanagement. With this trend to continue, management maintains a positiveforecast for full-year demand. Additionally, we want to highlight Tigermed’spromising growth potential in China’s market as the government persistswith its supportive policies for domestic pharmaceutical R&D.
    Well-progressing globalization strategy. The challenges of the industrydid not dampen Tigermed’s commitment to globalization. Underpinned by agrowing and dedicated team of 110 PMs and CRAs, Tigermed’s US clinicaloperation saw rapid growth in revenue and backlog in 2023. Its localizedclinical operation team enables Tigermed to better capture opportunitiesfrom both Chinese pharmaceutical companies looking to enter the USmarket, as well as from US clients not fully served by global clinical CROs.Tigermed acquired a Croatia-based clinical CRO, Marti Farm, in Jan 2023,further bolstering its service capabilities in Europe. Tigermed hasestablished clinical teams in South Korea, Southeast Asia and Australia.Owing to its strong performance in the global market, Tigermed signed 15MRCT projects in 2023. We think a well-established global network will helpTigermed in mitigating potential geopolitical risks.
    Maintain BUY. We revised our TP from RMB80.31 to RMB68.57, based ona 10-year DCF model (WACC: 10.95%, terminal growth: 2.0%), to factor inslower projection of revenue and recurring net income growth. We forecastTigermed’s revenue to grow 13.3%/ 17.7%/ 21.9% YoY and attributablerecurring net income to grow 14.2%/ 22.7%/ 27.4% YoY in 2024E/ 25E/ 26E,respectively.

Key takeaways from post-results call

潍柴动力(000338)
    During the post-results call yesterday, Weichai expected the industry HDTdemand in 2024E will be ~900k units (-2% YoY). Of this, China demand isexpected to fall by 10% YoY to 600k units while exports are expected to grow20% YoY to 300k units. Weichai expects the LNG price to stay low due tooversupply, which may help boost the demand for gas HDT. Meanwhile, highspeed large-bore engine will serve as an important growth driver for Weichai.We maintain Weichai as our sector top pick. Reiterate BUY with SOTP-basedTP of HK$22/RMB20.4 for Weichai H/A.
    Key takeaways:
    Industry HDT demand. Weichai expects China demand in 2024E will drop~10% YoY to 600k units, while exports will remain strong (+20% YoY to300k units). In the long-run, the industry HDT demand (China + exports) isexpected to be 800-900k units per year. Weichai believes it will be less likelyfor the demand to reach the peak level in previous years as constructiontruck demand will continue to be affected by weak property investment.
    Natural gas HDT. Weichai believes LNG price will stay low as overall gasdemand is weak while supply growth is underway. Therefore, Weichaiexpects gas HDTs will continue to see increasing penetration going forward(CMBI note: Weichai had 65% market share in HDT gas engine segment in2023, +6ppt YoY).
    Fleet size of medium- to heavy-duty trucks. At present, the combinedfleet size of HDTs and MDTs reached ~9.6mn units. Of this, NES III or belowaccounts for 900k units. Weichai expects the phase-out of NES III trucksthrough government subsidies will boost replacement demand.
    HDT industry consolidation. Weichai believes there will be only four majorHDT manufacturers in China after consolidation in the long-run. Salesvolume of HDTs could be ~150-200k units for each of them.
    High-speed large-bore engine. Weichai has already achievedbreakthrough in this market and is competing with Caterpillar (CAT US, NR)Cummins (CMI US, NR), MTU and Liebherr across the globe. The globalindustry size of large-bore engines (500kW or above) in 2023 was ~80kunits (10% growth per year in the past). Weichai delivered 8k units in 2023(+38% YoY), with a market share of ~10%. Driven by the strong demandfrom data centre construction, the size of large-bore engines has beenincreased to 2MW, and will further move up to 3-4MW, according toWeichai. Weichai also expects strong demand from the after sales market.The total industry size of large-bore engines is expected to reach US$20bnglobally.

4Q23 net profit +58% YoY; Payout increased to 50%; Higher earnings forecast on margin

潍柴动力(000338)
    Weichai’s net profit in 2023 surged 84% YoY to RMB9bn, which is in line withthe profit range of RMB8.58-9.32bn announced in Jan. In 4Q23, net profit grew58% YoY to RMB2.5bn. It’s worth noting that Weichai has declared a finaldividend of RMB0.293/shr. This, together with the interim dividend, implies thatthe payout ratio has reached 50% (up from 45% in 2022). We revise up our2024E/25E earnings forecast by 19%/20%, mainly due to higher marginassumptions across different segments. We maintain our positive stance onWeichai (sector top pick) as we see (1) the replacement cycle, (2) higher salescontribution of gas trucks, and (3) exports offering certainty on HDT industrysales growth in 2024E. We revise up our SOTP-based TP for Weichai H/A toHK$22/RMB20.4 from HK19.4/RMB17.8. Maintain BUY.
    Key highlights in 4Q23. Net profit grew 58% YoY to RMB2.5bn, driven by20% YoY revenue growth (to RMB53.6bn) and 3.3ppt YoY gross marginexpansion (to 23.7%). The gross margin in 4Q23 is the highest one since4Q18.
    Strong engine growth in 2023. The segment revenue grew 55% YoY toRMB60.8bn, driven by a 28% increase in engine sales and increase inblended ASP (due to more contribution of HDT engines based on ourestimate). The segment profit surged 1.7x YoY to RMB7.7bn, driven by5.5ppt YoY expansion of segment margin.
    Automobiles & components turned to profit in 2H23. The segment(mainly includes HDTs and parts) recorded RMB610mn of segment profit in2H23 (vs RMB24mn in 2H22 and -RMB16mn in 1H23), driven by operatingleverage.
    Forklifts & supply chain solution (KION’s operation) continued to seerecovery. The segment profit surged 10x YoY to RMB4.9bn in 2023 from alow base. According to KION’s latest guidance, the adjusted EBIT isexpected to grow 0-19% YoY in 2024E.
    Agricultural machinery helped by better margin. While the segmentrevenue dropped 9% YoY to RMB16.2bn in 2023, the segment marginexpanded 1ppt YoY to 4.1%. This helped boost the segment profit by 23%YoY.
    Risk factors: 1) weakness in engine export; 2) lower-than-expectedreplacement demand; 3) an increase in component costs.

New AWP capacity expansion plan to further enhance global competitiveness

浙江鼎力(603338)
    Zhejiang Dingli (Dingli) announced over the weekend that it plans to spendRMB1.7bn to build a new production base for 20k units of new energy aerial workplatform (AWP). We understand that the entire capacity will be for scissors lifts,given the rising demand for electric and advanced models in the overseas. Weestimate the new capacity will add 30% capacity in 2026-27E. With net cash of~RMB3bn based on our estimate, Dingli has sufficient internal resources tofinance the capex without the need to go for equity financing. While there will beno earnings contribution before 2026E, we believe the expansion plan will helpfurther enhance Dingli’s global competitiveness. Maintain BUY with unchangedtarget price of RMB70 (18x 2024E P/E, 1SD below the historical average of31x). Meanwhile, we believe Jiangsu Hengli (601100 CH, BUY), the majorsupplier of hydraulic components and motors, will also benefit from Dingli’scapacity expansion over the medium term.
    New capacity and sales contribution: Dingli’s board of directors approvedon 22 Mar a plan to construct a new production base for 20k units of newenergy AWP. Dingli estimates it will take 36 months to complete theconstruction. We see chance that the capacity will commence earlier thanplanned, given the previous capacity expansion experience. Dingliestimates that, under normal circumstances, the annual sales contributionfrom the new capacity could reach ~RMB2.5bn.
    Location of the new capacity: Dingli currently has five production basesin Deqing, Zhejiang. The site area has been fully utilized. Therefore, Dingliwill need to acquire a piece of new land in Deqing for the planned newcapacity.
    Capex: The total budget is estimated at RMB1.7bn, which include theacquisition of land, construction work and equipment procurement.
    Key risks: (1) Further intensified competition in China’s AWP market; (2)slowdown of overseas demand; and (3) sharp rebound of RMB rate.

Best effort to ensure business continuity

药明康德(603259)
    WuXi AppTec reported revenue of RMB40.3bn in 2023, up 2.5% YoY,attributable recurring net income of RMB9.7bn, up 16.8% YoY, and attributableadjusted non-IFRS net income of RMB10.9bn, up 15.5% YoY. Revenue was inline with Bloomberg consensus while attributable adjusted non-IFRS net incomebeat the consensus by 6.3%. Excluding revenue from the COVID-19 commercialproject, the Company delivered impressive revenue growth of 25.6% YoY in2023, despite the challenging environment in global CXO industry. For 2024E,management expected the reported revenue of WuXi AppTec to fall in the rangeof RMB38.3-40.5bn, representing a decline of 5.1% YoY to growth of 0.4% YoY.Excluding revenues from commercial projects related to COVID-19, the revenueis expected to rise by 2.7% to 8.6% YoY. Furthermore, management anticipatesthe adjusted non-IFRS net income margin will remain approximately on par withthe 2023 level, thanks to the company's ongoing efforts to enhance operationalefficiency, new capacity coming online, and the impact of FX fluctuations.
    Solid business development in 2023. With a solid phase synthesizercapacity of 32k L for peptide production, TIDES revenue remarkably grewby 64.4% YoY in 2023, on top of 337% YoY growth in 2022. Notably,backlog of TIDES as of Dec 2023 dramatically increased by 226% YoY.Drug safety assessment and SMO business experienced revenue growth of27.3% and 26.1% YoY, further solidifying the leading positions in theirrespective markets. ATU is working on two commercial projects and isadvancing another two potential commercial projects. Starting to receiveroyalty income in 2023, DDSU obtained NMPA approvals for three newdrugs developed for its customers with another two in NDA review stage.
    WuXi AppTec is actively cooperating with its customers to ensurebusiness continuity. The management of WuXi AppTec has reaffirmedtheir position, stressing that the company is not involved in the humangenomics sector and maintains no ties with any political entities,governments, or military organizations, thereby not posing national securitythreats to any nation. The management also emphasized that WuXiAppTec's client relationships remain robust, evidenced by severalcustomers entering into discussions for long-term contracts for theiradvanced-stage projects. These negotiations are made possible by theutilization of the "Grandfather Clause" incorporated in a revised draft billbrought before the US Senate.
    Share buyback to show confidence in the Company. WuXi AppTec hasalready cancelled RMB1.2bn H-shares under its 2023 H-share AwardScheme. Following the completion of RMB1bn A-share repurchase in Feb2023, the Company is in progress to repurchase another RMB1bn A-share.
    Maintain BUY. To factor in the uncertainties from geopolitical risks, we cutour TP from RMB116.01 to RMB67.53 (based on a 10-year DCF model withWACC of 10.73% and terminal growth of 2.0%). We forecast revenue togrow by -3.0%/ +10.3%/ +11.1% YoY and adjusted non-IFRS net income togrow by -5.5%/ +10.8%/ +12.9% YoY in 2024E/ 25E/ 26E, respectively.

四季度收入强劲，提振全年业绩

深南电路(002916)
    深南电路于上周五（3月15日）发布2023年财报，收入同比下降3.3%至135亿元人民币（高于我们/彭博预测的5%/2%），净利润同比下降14.8%至14亿元人民币（高于我们/彭博预测的11%/5%）。公司全年业绩因四季度的强劲表现而超出预期，该季度收入和净利润占全年业绩的30%和35%。四季度收入同比增长15.9%，环比增长18.6%，达到41亿元人民币；净利润同比增长6.6%，环比增长12.8%，达到4.9亿元人民币。毛利率连续三个季度提升，从二、三季度的22.8%和23.4%，升至四季度的24.2%。
    我们认为PCB行业已于2023年下半年达到周期底部，深南电路的PCB和封装基板业务的稼动率均有所回升。我们预计深南电路的业务也将于今年温和复苏，2024年收入增长12.5%。但考虑到PCB产品价格持续下跌以及电信市场需求疲软，预计下游需求不会在上半年全面复苏。同时，我们担忧铜价可能会进一步上涨，所以我们预估公司2024年净利润增长为10%。维持"持有"评级，目标价调整为79元人民币，基于24年的27倍市盈率（考虑到目前所处的周期位置），高于之前的25倍，但低于5年平均的32倍。目前股价处于28.5x24E P/E，相对合理。
    按主营业务划分来看，印刷电路板和封装基板于2023年的收入分别为81亿元和23亿元人民币，同比均下降8.5%；PCBA销售额为21亿元人民币，同比增长21.5%。相较2023年上半年而言，下半年的业绩更为强劲，环比分别增长8.0%/49.2%/80.8%。一方面，受益于下游库存消化接近尾声，封装基板的推动，稼动率在下半年回升至80%。另一方面，PCB由汽车和能源业务驱动迎来增长，但电信和数据中心的持续疲软抵消了部分影响。尽管AI需求带来了额外收入，但其贡献相对较小。2023年，PCB和封装基板业务的毛利率分别为26.6%和23.9%，同比分别下降1.57%和3.11%。两项业务的毛利率在下半年相较上半年均有所改善（增长1.36%和7.87%）。
    2023年，无锡基板二期工厂持续推进能力提升与量产爬坡；广州一期建设推进顺利，已于2023年四季度完成连线投产。长期看，深南电路在新业务和新技术方面的布局，将会利好公司未来的发展。但从短期看，工厂的爬坡可能对公司的利润率带来一定的压力（2023年研发费用增长31%）。
    同时，我们担忧铜价面临潜在的上涨。一方面，铜精矿加工费用在3月达到历史低点（11美元/吨）。另一方面，美联储可能在2024年6月进行降息，这些催化剂或将推动铜价上涨，进而影响PCB供应商的毛利率。

FY23 results beat helped by better 4Q

深南电路(002916)
    Shennan Circuit released its FY23 earnings, with revenue down 3.3% YoY toRMB13.5bn (5%/2% higher than our forecast/consensus) and net profit down14.8% YoY to RMB1.4bn (11%/5% higher than our forecast/consensus). TheCompany beat estimates thanks to a stronger-than-expected 4Q. Thequarterly revenue/NP accounted for 30%/35% of full year results. 4Q revenueincreased by 15.9% YoY/18.6% QoQ to RMB4.1bn, and net profit increased by6.6% YoY/12.8% QoQ to RMB490mn. GPM rose in three consecutive quarters to24.2% in 4Q (vs. 22.8%/23.4% in 2Q/3Q).
    We expect Shennan to have a modest recovery this year, as we believe thePCB sector has reached the end of the trough in 2H23. 2024 revenue growthis projected to be 12.5% from a low base in 2023, given utilization rates of bothPCB and substrate businesses are up. However, we do not expect a fullrecovery for Shennan, at least not in 1H24, considering ongoing priceerosion in PCB products and weak demand in telecom market. Meanwhile,we are conservative in NP growth (10% in 2024), due to a potential increase incopper price. Maintain HOLD with TP adjusted to RMB79, based on 27x2024E P/E, higher than previous 25x given the current position of the cycle, butlower than 5-year historical of 32x as challenges remain. The stock is currentlytrading at 28.5x 24E P/E, which is fair.
    By segments, in FY23, PCB/substrate revenue both declined by 8.5% YoY toRMB8.1bn/RMB2.3bn, while PCBA sales rose 21.5% to RMB2.1bn. 2H23results were much stronger, with 8.0%/49.2%/80.8% increase from 1H.Substrate sales grew as downstream inventory digestion has almost endedand utilization rate was back to 80% in 2H. PCB growth was mainly driven byauto/energy market, partially offset by ongoing weakness intelecom/datacenter. AI demand brought incremental revenue, however, thecontribution was not large. GPM for PCB and substrate businesses were26.6% and 23.9%, declined by 1.57ppts and 3.11ppts, respectively. 2H23GPM was improved from 1H for both segments (1.36ppts and 7.87ppts).
    Despite industry headwinds, we think Shennan is poised for future growth asthe Company achieved a significant milestone in its FC-BGA production lines.Wuxi phase II and Guangzhou factories are ramping up capacity, which willbenefit Shennan in the long run. However, in the short term, these twoprojects are likely to weigh on margins (R&D exp. up 31% in FY23).
    A potential increase in copper price. We saw copper concentrates TC indexreached historical low at US$11/tonne in March. In addition, Fed may cutrates in June 2024. These catalysts may favor a jump in copper price in thenear term, which will hurt PCB suppliers’ GPM.

Improved margins in 2023

中兴通讯(000063)
    ZTE released its FY23results.Revenue grew by1.1%YoY to RMB124bn,in linewith consensus and3%higher than our forecast.Net profit increased by15.4%YoY to RMB9.3bn,5%lower than consensus and in line with our forecasts.Grossmargin for2023was41.5%,representing a434bps increase from FY22.NPMshowed a similar trend,reaching7.5%in FY23from4.2%/5.9%/6.6%in FY20-22.ZTE’s profitability improved steadily as a result of the company’s continued effortsin operation optimization and cost reduction(i.e.,self-developed components).
    For4Q23,the company's revenue grew by14.7%YoY and21.5%QoQ,whileits net profit grew by17.8%YoY and fell by37.3%QoQ,respectively.Thesequential decline was mainly due to1)a lower GPM(36.0%in Q4vs.44.6%in Q3)on a less favorable revenue mix,which was partially offset by costoptimization with in-house designed components in Consumer/Governmentand Enterprise segments,2)a42.5%increase in SG&A in Q4on higheremployee benefits and marketing.
    By segment,1)revenue from Carrier segment increased by3.4%YoY ondomestic market share gains in RAN and non-RAN businesses and overseasprogress.2)Consumer segment sales declined by1.3%YoY on overseasinventory digestion and intensified competition,partially offset by domesticgrowth in family network business.3)Enterprise&gov't segment salesdeclined by7.1%YoY in2023due to a slowdown in investment.
    Looking ahead to2024,we believe ZTE is poised to capitalize on emergingtrends in the telecom industry,focusing on the evolution towards5.5G/6G andAI compute power.Maintain BUY on ZTE(000063CH)with adjusted TP atRMB34.2,based on15x2024E P/E,which is close to its3-year avg.(vs.previous16.5x,considering potential downside risk from continued industryheadwinds and slower-than-expected development in AI).Next catalyst maybe telecom operators'capex outlook.

FY23 preliminary results review; expect gradual recovery in 2024

生益科技(600183)
    Shengyi Tech unveiled its FY23 earnings preview after Tuesday's market close.Full-year revenue was RMB16.6bn (-7.9% YoY) and net profit was RMB1.16bn (-24.0% YoY), which were 3%/13% and 3%/9% lower than our/consensus estimates,respectively. For 4Q23, revenue decreased 2.3% YoY and 5.1% QoQ to RMB4.2bn.Quarterly net profit dropped more sharply by 20.8% YoY and 23.1% QoQ toRMB264.6mn. The miss was mainly due to larger-than-expected declines in ASP inboth CCL and PCB segments on weaker demand and intensified competition, whicheroded GPM, although partially offset by growing shipments of CCL products.Looking forward, we think the business will gradually recover in 2H24 afterbottoming in 1H. New CCL product, which has been certified by Nvidia and isexpected to begin the next testing phase soon, should also contribute additionalrevenue in 2024. Maintain BUY with TP adjusted to RMB19.69.
    By segment, the company’s PCB subsidiary Shengyi Electronics (688183 CH)posted 2023 revenue of RMB3.3bn, down 7.4% YoY, due to heightened marketcompetition and falling telecom demand. Its revenue managed to grow 2.7%YoY and 9.1% QoQ in 4Q23, as the company reduced its prices to maintain itsmarket share. However, GPM was significantly eroded. Meanwhile, ShengyiElectronics is ramping up its production at one of its facilities (Dong Cheng IV),which also put pressure on margin. For 2024, we expect PCB segment revenueto grow ~10% YoY considering 2023 had a low base, and expect a moderaterecovery in 2H24.
    For the CCL segment, excluding Shengyi Electronics’s PCB sales, revenuefrom CCL and other business was ~RMB13.3bn, down 8.0% YoY. Revenuedecreased moderately in 4Q23 on weaker demand, which was partially offsetby reduction in raw materials costs. We forecast CCL segment revenue to grow~21% YoY, with additional contribution from AI demand. Shengyi Tech’s latestultralow (UL) loss CCL product has been certified by Nvidia and is expected tobegin the next testing phase soon.
    We cut our 2024E revenue forecast by 4% and lower GPM by 0.7ppt to 22.1%,considering weaker-than-expected market demand and intensified competition.We expect the business will gradually recover in 2H24 with additional revenuecontribution from new customers. Maintain BUY with adjusted TP ofRMB19.69, based on the same 22.5x 2024E P/E multiple, less than 10%lower than the stock’s 5-year historical forward P/E of 24.1x. Potentialdownside risks include: 1) worse-than-expected macro environment recovery,2) continuous ASP pressure, and 3) increasing upstream material costs.

收购惠泰医疗，强势切入心血管介入赛道

迈瑞医疗(300760)
    1月28日，迈瑞医疗公告拟通过全资子公司深迈控以66.5亿元自有资金收购惠泰医疗控股股东成正辉及其他股东合计持有的惠泰医疗约1,412万股股份，占惠泰医疗总股本的21.12%。同时，深迈控拟以129.28万元受让晨壹红启持有的珠海彤昇全部0.12%的普通合伙权益，珠海彤昇持有惠泰医疗233.5万股，占股3.49%。深迈控将成为珠海彤昇GP和执行事务合伙人，迈瑞医疗仍继续为珠海彤昇的LP。本次交易完成后，深迈控及其一致行动人珠海彤昇将合计持有惠泰医疗约24.61%的股权，深迈控将成为惠泰医疗的控股股东。交易完成后，惠泰医疗原实控人成正辉仍将拥有惠泰医疗18.73%的股权，以及8.73%的表决权，并拟担任惠泰医疗的副董事长兼总经理。我们认为，管理团队的稳定将有利于后续的并购整合。
    收购惠泰医疗将贡献业绩增量。惠泰医疗公告预计2023年实现归母净利润5.10-5.65亿元，同比增长42.5%-57.8%。根据彭博一致预期，2024年惠泰医疗有望实现收入22.1亿元，归母净利润6.7亿元。我们预计此交易仍需一段时间才会完成。假设惠泰医疗自2024年初开始全年并表，我们估计此项并购将拉动迈瑞医疗2024E/25E收入增长5.2%和5.7%，拉动归母净利润分别增长1.2%和1.3%。截至2023年三季度末，迈瑞医疗货币资金余额为196.7亿元，我们估计迈瑞医疗2023年将产生121亿元经营现金流，90亿元自由现金流。因此，公司资产负债表强劲，此次现金收购不会对迈瑞医疗产生资金压力。此次并购将新增约65-70亿元商誉。
    控股收购，估值稍有溢价。根据我们的测算，本次交易的估值约为45倍FY24E PE（基于彭博一致预期），对应惠泰医疗1月26日收盘价溢价约25%。我们认为，约25%的控制权溢价相对合理。迈瑞医疗将通过收购惠泰医疗能快速切入心血管介入赛道，支撑公司的长期快速发展。惠泰医疗是中国电生理领域的龙头企业。电生理全球可及市场空间超过100亿美元、其中国内超过100亿元人民币。目前中国电生理市场的接近90%的市场份额被进口品牌占据，未来国产替代空间大。
    积极并购，成长为全球器械龙头。在人口老龄化的趋势下，耗材类产品有望长期快速增长。此前，迈瑞医疗通过自研+并购的模式，相继拓展了微创外科和骨科赛道，进军高值耗材市场，以此打造公司的第二增长曲线。根据弗若斯特沙利文，IVD、医疗影像设备和心血管器械是2021年全球医疗器械市场收入排名前三的细分市场，合计市场占比46.2%。目前迈瑞医疗的核心业务已涵盖IVD和医疗影像设备领域，收购完成后，迈瑞医疗得以迅速拓展第三大医疗器械细分市场。此外，惠泰医疗三季度海外业务增长超90%，海外收入占比约16%，拥有较强的出海潜力。通过此次收购，迈瑞医疗将充分利用全球市场的资源优势完善惠泰医疗的全球化布局，实现强强联合，提升迈瑞医疗在全球市场的综合竞争力。
    维持买入评级，目标价383.83元人民币。考虑到此次交易尚未完成，我们暂未调整对于迈瑞医疗的盈利预期，基于8年的DCF模型，目标价383.83元人民币（WACC：9.4%，永续增长率：3.0%）。

True beneficiary in AI value chain

中际旭创(300308)
    We think 2024 is set to be another solid year for both infrastructure investmentsand downstream demand continue to thrive. According to Bloomberg'sconsensus, CSP3 (comprising Amazon, Google, and Microsoft) along with Meta,are projected to ramp up their capex by 16.6%/7.6% YoY in 2024/2025E. Wereaffirm our positive stance on optical transceiver players, specifically in light oftheir ongoing capacity expansion and production ramp-up of the high data rateoptical modules, e.g., 400G/800G products. We maintain BUY on Innolight,with new TP of RMB136.
    Last week, TFC pre-announced its FY23 earnings, with NP growth of 68-88%YoY to RMB677-758mn. The robust performance was primarily driven by thelofty demand for AI computing power in data centers, boosting sales of TFC’shigh speed optical modules. TFC’s performance underscored our confidence inInnolight, one of our top picks as a true beneficiary in AI value chain.
    Considering greater-than-expected ramp-up of TSMC’s CoWoS capacity andcontinued strong investments in AI infrastructure, we expect Innolight’s 2024/25Erevenue to come in better than our previous estimates. We revised up revenueforecasts by 22%/31% and lifted GPM to 34% and 33% for 2023E/24E/25E(vs. prior 32%/32%). The new TP is based on 30x 2024E P/E, which is closeto 5-year historical average of forward P/E (vs. previously 35x, factoring in marketsentiment).
    We recommend investors pay special attention to the forthcoming earnings ofCSP3 & Meta next week. The focus should be on their future projections for cloudrevenue and capex guidelines, as these factors will be pivotal in understandingthe industry's future direction.

4Q23E earnings surged 31-71% YoY, above expectation

潍柴动力(000338)
    Weichai Power (Weichai) pre-announced last night (23 Jan) that net profit in2023E is expected to surge 75-90% YoY to RMB8.58-9.32bn, which is betterthan expectations as both our and consensus estimates are only close to thelow end of the profit range. The profit alert implies that Weichai delivered netprofit of RMB2.08-2.82bn in 4Q23E (up 31-77% YoY), with a midpoint ofRMB2.45bn (+54% YoY). As we highlighted in our note on 15 Jan (link),Weichai’s multi-cylinder diesel engine sales volume surged 51% YoY in 4Q23(surpassing the industry average of 26%), driven by strong HDT enginedemand. We maintain our bullish view on Weichai (sector top pick) as areplacement cycle will offer certainty on HDT industry sales growth in 2024E.Maintain BUY with unchanged SOTP-based TP of HK19.4 (H) / RMB17.8 (A).
    LNG/Diesel price spread expanded again. The price ratio reached arecent peak of 0.9 in late Dec 2023, which made LNG truck less attractiveto buyers. That said, with the latest LNG price declining 29% since late Dec,the price ratio dropped to 0.69 at present. We believe the current pricedifference will boost the sales of LNG trucks again given the lower operatingcosts to truck owners. We see this as a near-term driver for Weichai givenits 60% market share in the HDT gas engine segment.
    Key catalysts: 1) Further expansion of LNG/Diesel price spread; 2) strongthan-expected HDT sales figures in 1Q24E.
    Risk factors: 1) weakness in engine export; 2) increase in componentcosts; and 3) weaker-than-expected new business growth.