(Report Producer/Analyst: Huatai Securities, Huang Leping, Chen Xudong, Hu Yuzhou)
Dongshan Precision: PCB leader, consumer electronics + automotive electronics two-wheel drive diversified layout
Founded in 1980, DSB's business covers electronic circuits, optoelectronic displays, precision manufacturing and other fields, with a total revenue of 31.58 billion yuan in 2022, of which the electronic circuit segment accounts for about 70% of the revenue, contributing the main revenue.
The company's products are widely used in consumer electronics, new energy vehicles, communication equipment, industrial equipment, medical equipment and other fields.
The company is Apple's flexible board supplier, and has been selected as one of the top 10 PCB companies released by China Printed Circuit Industry Association, Prismark, N.T. Information and other associations and research institutions for many years.
In recent years, the company has put forward the strategy of "consumer electronics + new energy", with a two-wheel drive diversified layout, determined to seize the development opportunities of new energy vehicles and rebuild Dongshan in the automotive field.
Investment logic
Investment Takeaway #1: The consumer electronics fundamentals are stable, and the module board/MR equipment contributes to the increment
In 2016, the company acquired MFLX to enter the FPC market, and in the same year, it entered Apple's supply chain and implemented the strategy of large customers.
1) In the short term, the module board contributes to the ASP increment of a single machine. In 2023, the company has successfully introduced key customer display module boards, and will strive to introduce battery/camera module boards in the future to contribute to revenue increments;
2) In the long run, the company, as a supplier of Apple and Meta, is stuck in the MR field. With the launch of the Vision Pro, MR is poised to benefit the company in the long term as the next stage of innovation in consumer electronics.
Investment point #2: Build the second curve of automotive electronics around T customers, and contribute incremental electronic circuits/precision parts/photoelectric displays
The company is giving full play to the scale effect and technical advantages of the world's leading PCB and veteran precision manufacturers, and is laying out the automotive field around Tesla, a major customer, under the trend of automobile electrification, intelligence and networking.
Looking ahead, 1) electronic circuits: the company is actively deploying FPCs and PCBs for vehicles, which is expected to benefit from the increase in the value of electronic circuit boards brought about by the trend of automotive modernization, 2) precision structural parts: deeply involved in Tesla 4680 battery structural parts, body-in-white, heat dissipation parts, three-electric housing and other projects, 3) optoelectronic display: In 2022, the company acquired Suzhou Jingduan, a subsidiary of JDI, as the world's top five automotive screen factories, covering the world's top 10 tier1 manufacturers, and is expected to further contribute revenue in the future.
A view that distinguishes it from the market
Opinion #1: In 2023, the company's performance was affected by weak downstream terminal demand and delays in the introduction of some products. Looking ahead to 2024, the market is concerned that there is still uncertainty about the company's revenue and profits.
However, we believe that the company's revenue and profit growth in 2024 will be more visible, mainly from: 1) electronic circuit boards, the company will introduce display module boards at the end of 2023, and revenue will be released in 2024, 2) display-related business, as the downstream demand of the industry gradually recovers, LED losses are narrowing quarter by quarter, and we believe that in 2024, the losses of touch display business and LED business are expected to be further reduced, and 3) precision structural parts, 2023 The company's capital expenditure in the automotive field is large, and we believe that the new plant is expected to contribute more profits as the utilization rate of new production capacity increases.
Viewpoint #2: The market believes that the competition in the automotive field is becoming more intense, and the company is worried about the progress of the company's product introduction in the field of automotive precision structural parts.
We believe that the fierce competition in the automotive field affects the overall profitability of the industry, but the market has not yet fully realized the company's advantages in the automotive field: 1) In 2024, the value of precision structural parts will increase with high certainty: battery trays, body-in-white medium and large products and other products will continue to be introduced; 2) The overseas layout is perfect, and it has the ability to undertake overseas production capacity: battery cells, shells and other products have transportation radius requirements. Mexico and other regions, around the location of the factory of large customers to carry out a global layout, conducive to the introduction of products;3) customer diversity improvement: the company starts with the industry's leading large customers, and is gradually introducing the supply chain of other leading manufacturers in the industry.
Company structure: three major sectors, five business divisions
In 2020, DSB formed a new generation of management with Mr. Shan Jianbin as the core to promote the reform of the company's structure and clarify the division of rights and responsibilities of each business division.
At present, the company has formed three major business segments: electronic circuits, photoelectric display and precision manufacturing, and has established five business divisions: MFLEX, MULTEK, LED, touch display and precision manufacturing, which are managed by the group headquarters.
The company actively promotes the synergy of various business segments in R&D, technology, supply chain, products and markets, and gradually builds a vertically integrated industrial chain competitive advantage through the integration of internal resources and coordinated development, and strives to provide customers with all-round, one-stop and technology-leading comprehensive product solutions in the field of intelligent interconnection to meet the customized needs of customers to the greatest extent.
Development history: PCB leader, combination of epitaxial mergers and acquisitions and endogenous development
The company originated in 1980 as a sheet metal and stamping business, and in 1998, Dongshan Sheet Metal was officially established. In 2007, the company changed its name to Dongshan Precision and was listed on the Shenzhen Stock Exchange in April 2010. Since 2011, the company has continuously improved its business system through the combination of extension mergers and acquisitions and endogenous development, broken through the bottleneck of industry development, and continued to introduce advantageous industries that can bring new profit growth points.
In 2016, the company officially entered the FPC field with the acquisition of Mflex, and in 2018, the company acquired Multek to complete the rigid board business. Since 2021, the company has accelerated the layout of new energy and proposed to rebuild Dongshan in the automotive field. At present, the company has become the world's top PCB supplier in terms of revenue, a well-known manufacturer of touch display modules and LED devices in the industry, and a featured enterprise that provides comprehensive solutions for new energy vehicles.
Shareholding structure: The family holds a total of 28.28%, and the shareholding structure is stable
The management of the family-owned holding company is relatively stable, and the holding/shareholding enterprises highlight the company's comprehensive layout.
The Yuan family is the actual controller of the company, holding a total of 28.28% of the shares as of September 30, 2023. Among them, Yuan Yongfeng is the general manager with a direct holding of 13.01%, Yuan Yonggang is the chairman of the board of directors with a direct holding of 11.83%, Yuan Fugen is directly holding 3.44%, and no other shareholder holds more than 5% of the shares.
It can be seen that the company's family-owned holding management is relatively stable, which is conducive to the company's reduction of agency costs and incentives for long-term operation. At the same time, the company launched employee stock ownership plans in 2021 and 2022 to effectively motivate core management personnel and technical talents to share the fruits of development, realize the binding of interests and maximize the company's value, and demonstrate confidence in long-term development.
Earnings forecasts
The main source of revenue of DSBD is electronic circuit boards, and the automobile-related business is expected to create the company's second growth curve.
Benefiting from the addition of new part numbers in the consumer electronics business and the expansion of automotive-related businesses, we estimate that the company's operating income in 2023E-2025E will be 327.3/387.6/45.02 billion yuan, respectively, corresponding to a CAGR of 12.5% in 2023-2025E. At the same time, as the company focuses on the core track of "consumer electronics + new energy" and gradually optimizes the product structure, we expect the company's gross profit margin to increase to 16.9% by 2025E, and the net profit attributable to the parent company will reach 3.45 billion yuan in 2025E (23-25E CAGR: 13.3%).
Electronic circuit boards
Electronic circuit boards are the basic revenue of the company, mainly including hard board and flexible board revenue.
1) Flex board. Dongshan entered the flexible circuit board market with the acquisition of Mflex in 2016 and cut into Apple's supply chain in the same year, which mainly focuses on consumer electronics terminals such as smartphones and automotive electronics.
In terms of consumer electronics, in the short term, the company's gradual introduction of module boards has brought about an increase in the value of smartphone stand-alone products, and in the long term, the company's card position MR and other wearable devices are expected to benefit from consumer electronics innovation.
In terms of automotive electronics, the intelligent, integrated and lightweight of new energy vehicles has promoted the increase in the demand for on-board FPC market, and the company has actively deployed around major customers in the automotive field.
2) Rigid board. Dongshan acquired Multek in 2018 to fill the chip gap, and downstream scenarios include communication base stations, data communications, industrial control, medical, automotive, etc.
According to the annual report, from 2020 to 2022, Multek's revenue was +7.2%/+43.9%/-2.6% year-on-year to 33.2/47.8/4.65 billion yuan. Looking ahead, the high boom in cloud computing and AI will also accelerate the construction of data centers, driving the demand for PCBs for servers and switches. In addition, the company is actively expanding business opportunities related to rigid boards around major customers in the automotive field, and is expected to benefit from the increase in the value of single-vehicle PCBs under trends such as electrification and intelligence.
On the whole, we expect the company's electronic circuit products revenue in 2023-2025E to be 212.8/249.5/28.94 billion yuan, a year-on-year increase of -2.5%/+17.3%/+16.0%, and 2023E-2025ECAGR or 9.9%.
On the earnings front, we believe gross margin may decline due to weak consumer electronics demand in 2023. In 2024-2025E, with the gradual increase in the industry's prosperity, we believe that the gross profit margin will rebound, and the gross profit margin is expected to be 20.0%/20.3%/20.5% respectively in 2023-2025E.
Touch panel and LCM module In 2020-2022, the revenue of touch panel and LCM module will be 40.9/51.6/3.40 billion yuan, accounting for 14.6%/16.2%/10.8% respectively.
In 2022 and earlier, the business was primarily focused on consumer electronics. In 2022, the company acquired Suzhou Jingduan, a subsidiary of JDI, as one of the world's top five automotive screen factories covering the world's top 10 tier1 manufacturers, which is expected to make up for the shortcomings of the company's touch display business in the field of automotive electronics.
Looking ahead, thanks to the acquisition of Suzhou Jingduan and the development of new customers, we believe that the revenue of this business is expected to achieve a significant increase, and the revenue is expected to increase by 48.1%/7.6%/9.1% year-on-year to 50.4/54.2/5.91 billion yuan in 2023-2025E.
In terms of profitability, profitability has rebounded due to the consolidation of Suzhou Crystal End, and the gross profit margin is expected to recover to 2.7%. From 2024 to 2025E, with the gradual recovery of the consumer electronics boom and the increase in gross profit margin from new businesses in the field of automotive display, we expect gross profit margin to recover to 4.0%/8.0% respectively.
LED and its modules In 2022, due to the weak downstream demand for consumer electronics, the company's LED-related product revenue and production and sales volume will decline sharply, with revenue falling by 35.4% year-on-year to 1.68 billion yuan. Looking ahead, we believe that with the gradual recovery of the consumer electronics boom, the loss of this business will narrow quarter by quarter, and it is expected that the revenue of 2023-2025E will be -40.0%/+5.0%/+20.0% year-on-year to 10.1/10.6/1.27 billion yuan.
In terms of profitability, as the business gradually turns around from loss to profit, the gross margin is expected to be -37.0%/2.0%/6.0% in 2023-2025E, respectively.
Precision component products
DSBD has decades of experience in precision component processing, and its product system covers communication equipment components, new energy vehicle parts, semiconductor parts, etc.
Driven by the new energy strategy, the company has laid out the precision structural parts business around T customers, and actively entered the fields of body-in-white, battery structural parts, water-cooled plates, and three-electric shells.
With the gradual deepening of the company's cooperation with major customers, we expect that the company's precision component product revenue in 2023-2025E will be +15.7%/+36.2%/+21.6% year-on-year to 52.6/71.7/8.71 billion yuan, and the CAGR of 2023-2025E will reach 24.2%;
Valuation
We selected FPC leader Pengding Holdings, PCB manufacturers Shennan Circuit and Kinwong Electronics, precision manufacturing leader Luxshare Precision extending from consumer electronics to automotive electronics, and Tesla structural parts supplier Tuopu Group as comparable companies, referring to the comparable company 16.6x2024E PE, considering the development potential of the company's automotive business, giving 17 times PE in 2024, corresponding to a target price of 26.4 yuan.
Stock price review
Since its listing in 2010, DSB's share price has mainly experienced the following fluctuations:
1) Listing - At the end of 2012, the overseas economic growth slowed down, and the company's traditional communication equipment business grew less than expected. In addition, the LED business is in the production capacity release period, the gross profit margin is low, and the stock price continues to decline;
2) From the beginning of 2013 to the middle of 2015, the global communication equipment customer demand picked up, and the company's traditional communication equipment business recovered;
3) From mid-2015 to the end of 2017, after a short-term suspension of trading due to the impact of the stock market crash, Mflex was acquired in 2016 to cut into the supply chain of A customers, and through integration, Mflex's profitability has been greatly improved;
4) From the beginning of 2018 to the beginning of 2019, the demand for consumer electronics was weak, and the shipments of customer A declined, and at the same time, the Sino-US trade friction increased, which affected the market's valuation of the consumer electronics sector;
5) From the beginning of 2019 to the beginning of 2020, the value of new flexible board products of customer A increased significantly, and the company's new rigid board business increased in volume; The layout of 5G base station business has achieved initial results;
6) From the beginning of 2020 to the beginning of 2021, at the beginning of the epidemic, the market lacked confidence in the consumer electronics sector, and the company's valuation was revised downward;
7) From the beginning of 2021 to the beginning of 2022, the company's flexible board ASP and share increased in customer A, and at the same time, the company became the core supplier of VR software/hard board for customer M.
8) From the beginning of 2022 to the middle of 2022, the core business grew steadily, the expansion of new energy business was increased, and the introduction of new customers and new products was smooth;
9) From mid-2023 to the present, the downstream demand is weak, the growth rate of the company's flexible board business has slowed down, and the LED business has continued to lose money.
Consumer electronics: the domestic flexible board leader, bound to major North American customers
When the transfer of the flex board industry is carried out, there are deep barriers to technology/capital/customer competition
Flex: The market is expected to grow to $17.18 billion by 2026, mainly in consumer electronics
FPC, also known as flexible board, flexible circuit board or flexible printed circuit board, has the characteristics of lightweight, thin, bendable, etc., and is widely used in mobile phones, tablet computers, e-books, digital cameras, medical instruments and other equipment.
According to a report by Huajing Industry Research Institute, in 2019, consumer electronics accounted for more than 80% of the downstream field of flexible boards, and the rest were automobiles, servers, medical care, etc. According to Prismark, the global FPC output value is expected to grow to $17.18 billion in 2026, with a CAGR of 4.1% in 21-26.
Flex board competition pattern: Chinese capital increased investment, and Japanese capital gradually withdrew
From the perspective of the global FPC regional competition landscape, Asia is the main FPC producer, and Chinese mainland, South Korea, Taiwan, and Japan are the most important producers. Since the beginning of this century, due to the rising costs of manpower, materials, and rents in Japan and South Korea, the electronic industry chain has accelerated its transfer to Chinese mainland. Taking Japan as an example, during the 2008 financial crisis, the output value of Japan's soft and hard boards fell in half. Since then, the overall downward trend has been maintained.
From the perspective of major manufacturers, due to the low gross profit of traditional FPC products, which are not the core business of Sumitomo and Fujikura and other leading companies, and require a large amount of investment to maintain the automation and intelligent update of equipment, Japanese and Korean manufacturers lack capital expenditure momentum and turn to other high-yield directions. Domestic enterprises enjoy the advantages of national policy dividends and the whole industrial chain, with low production costs and short investment cycles, which are conducive to rapid response to market demand and obvious substitution potential. Prismark predicts that by 2026, China's flexible board output value will account for 48.9% of the world's total, with a CAGR of 5.1% in 21-26 years, exceeding the global average.
The leading effect is prominent, and the market concentration is high. Due to the high market concentration pattern of the downstream consumer electronics industry and the high requirements of downstream customers on the supply side, the leading effect of the FPC industry is obvious and the market concentration is high, and in 2019, the sum of the shares of Qisheng, Pengding and Sumitomo alone accounted for 60.5% of the entire FPC market share.
Competitive barriers to FPC: high barriers to capital and customer access
With the intensification of oligopoly competition in the flexible board industry, for new entrants, the entry threshold for technology, capital and customers is high. In terms of technology, the FPC manufacturing process is complex, the production yield rate is relatively low, the material selection is strict, and the production and technical team with professional knowledge and practical experience needs to be equipped.
In order to maintain product competitiveness and rapid delivery capabilities, it is necessary to continuously upgrade production equipment and processes, and build factories in the production concentration areas of downstream customers.
From the customer's point of view, when electronic product manufacturers choose a flexible board supplier, they generally need to go through a strict certification assessment in 1-3 quarters, and the two parties usually cooperate by gradually increasing orders and supply on the basis of forming a distribution relationship.
In addition, once a long-term and stable cooperative relationship is formed, new suppliers will not be easily launched, thus forming a high customer recognition barrier.
The basic plate of the fruit chain is stable and embraces large customers
Acquired MFLX and entered the flex board business and cut into Apple's supply chain
In 2016, the company acquired MFLX to enter the flexible circuit board market, so it entered Apple's supply chain in the same year and actively embraced large customers. At the same time, the capital expenditure of Japanese FPC suppliers continues to decline, and the supply share of Sumitomo and Fujikura manufacturers in the fruit chain is gradually shrinking.
FPC is widely used in Apple products, driving the development of the FPC industry
With the innovation and development of intelligent electronic products, the number of components in products continues to increase, the battery capacity is also expanding, and the internal space tends to be tight, and the demand for FPCs with thin and light, small size and high wire density is increasing.
As a leader in the mobile phone industry, Apple has driven the development of the FPC industry with its own large order demand and demonstration effect on other brands.
Specifically, Apple has taken the lead in the upgrade process of the motherboard's "ordinary HDI-any-layer HDI-SLP load-based version;Since the original iPhone, Apple has applied the FPC antenna design structure, and since then, successive innovations such as fingerprint recognition, dual cameras, OLED, wireless charging, and carrier-like boards have been realized through FPC. At present, iPhone, Airpods, iWatch, iPad, MAC and other products all use FPC, and the related market space is constantly expanding.
In the short term, look at the increment of module boards, and in the long term, look at wearable and MR devices
Short-term drive: cut into the supply chain of module boards of major customers
The company gradually entered the module board business, and the value of the single machine increased.
In the past, Apple's display modules were mainly supplied by Korean manufacturers such as Samsung. In 2021, the OLED panel quota agreement between Samsung and Apple expired, and BOE successfully entered the iPhone screen supply chain, and in 2023, the company cut into the Display module board through BOE display and is expected to cover the rest of the panel manufacturers.
At the same time, OLED accelerates the transformation from RFPCB solutions to FPCs, and the company's advantages are further strengthened. In the future, the company is expected to continue to introduce battery module boards and camera module boards, and the value of a single machine will be further increased.
Long-term drive: Focusing on wearable devices, AR/VR brings new opportunities
As a supplier of Apple and Meta, DSBJ is expected to benefit from new opportunities for AR/VR development. In recent years, the wearable device market has boomed, which has led to an increase in the demand for FPCs.
Taking AR/VR devices as an example, IDC predicts that global AR/VR device shipments will reach 28.64 million units in 2027, with a CAGR of 27% in 2023E-2027E.
In January 2024, Apple's first headset hardware, the Vision Pro, will be released, and Counterpoint expects 500,000 units of the first generation to be sold.
In March 2014, Facebook entered the metaverse hardware market with the acquisition of Oculus VR.
The Oculus Quest 2 was officially released in October 2020, and shipped 7.8 million units in 2022, up 4% year-on-year.
In June 2023, Meta announced the launch of the Quest3, which was officially released in the fall of '23.
In the long run, as a supplier of Apple and Meta, the company is stuck in the MR field and is expected to benefit from the new opportunities for consumer electronics brought by MR in the long run.
Automobile: Actively building a second growth curve, which is expected to rebuild Dongshan
Focusing on key customers, the new automotive business was deployed, and the value of single vehicles continued to increase
Global/Chinese EV sales and penetration rates are increasing rapidly
In recent years, the sales and penetration rate of electric vehicles have increased significantly.
In 2022, global EV sales were 10.02 million units, up 59% year-on-year, while China's EV sales were 6.04 million units, up 90% year-on-year. At the same time, from 2019 to 2022, the global penetration rate of electric vehicles jumped from 2% to 13%, and in China from 4.3% to 25.0%. The company's existing electronic circuits, precision structural parts, and photoelectric display are all involved in new energy vehicles.
The company is giving full play to the scale effect and technical advantages of the world's leading PCB and established precision manufacturers, and actively building the second growth curve under the trend of vehicle electrification, intelligence and networking, driving the transformation and upgrading of the three traditional businesses, and rebuilding Dongshan in the automotive field.
The company replicates the development route of consumer electronics and makes every effort to develop the automotive business
The company put forward the strategy of "consumer electronics + new energy", hoping to replicate the development path of consumer electronics and make every effort to develop the automotive business.
In the era of consumer electronics, the company has bound up with customer A and continuously broadened its business boundaries through the acquisition of Mflex and Multek, while in the era of new energy vehicles, the company continued to implement the key customer strategy, cut into Tesla's supply chain and actively develop new products. In terms of organizational structure, in 2021, the company set up an automotive business coordination group to focus on the automotive business as a whole, in terms of production capacity, since 2020, DSB has accelerated fundraising through non-public issuance of shares and convertible bonds, continuously enriched automobile-related projects and expanded factories at home and abroad, and in terms of capital operation, the company acquired Aranda, Auto Tech US, and Auto Tech Mexico through its wholly-owned subsidiary, and acquired 100% of Suzhou Jingduan, a subsidiary of JDI equity, improve the territory of the automotive field.
Strengthen the strategy of key customers, and lay out new automotive business around key customers
In 2022, Tesla delivered 1.31 million vehicles, a year-on-year increase of 40%, and continued to be the world's champion in pure electric vehicle sales. Since making its first profit in 2013, Tesla's global sales have continued to climb, with a CAGR of 57% between 2014 and 2022.
According to a report by Trend Force, Tesla's pure electric market share reached 21.7% in the second quarter of 2023, and against the backdrop of global economic pressure, production and deliveries were both above 450,000 units, reaching a record high.
Strengthen the key customer strategy and carry out global production capacity layout around Tesla's factory.
The company has been supplying flexible boards to Tesla since the acquisition of Mflex, and now provides a variety of categories such as electronic circuit boards and structural parts.
Due to the high freight cost of products such as body-in-white, and the transportation radius requirements for battery structural parts, the company follows the principle of proximity to the location of Tesla's factory to carry out a global layout.
Through epitaxial mergers and acquisitions and endogenous development, the company combines new production capacity with the original platform, and its production bases and sales teams are located in Asia, Europe, North America and other places to fully meet the large-scale procurement needs of customers.
Electronic circuits: The three modernizations promote the value of automotive PCB, and the company actively deploys automotive FPC+PCB
Vehicle Electrification #1: New Energy Vehicles (NEVs) have significantly increased the need for PCBs due to their unique powertrains.
According to the different power structures, new energy vehicles can be divided into pure electric vehicles and hybrid vehicles, among which, pure electric vehicles (BEV) are completely driven by electric motors, while hybrid electric vehicles (HEV) introduce a new electric drive system while retaining the traditional automobile fuel engine.
According to our report "Cloud Computing and Vehicle Electrification Drives Business Development" released on April 24, 2022, the three major components of the electronic control system of new energy vehicles, VCU, MCU and BMS, will generate a total of 3.42-5.42 square meters of new PCB demand, and bring about 2,000 yuan in value increase for PCB for a single vehicle.
Vehicle Electrification #2: FPC is accelerating the replacement of traditional wiring harnesses in power batteries, driving its own demand growth.
Due to the rapid cost reduction brought by the excellent performance and large-scale mass production of FPC, it will gradually be rolled out in the automotive field, and the largest increase will come from the power battery field. In the past, the traditional copper wire used in the power battery needed to cooperate with the wiring harness when the current signal was large, which occupied a large space and the degree of automation in the assembly process was low; according to Gasgoo, if the FPC flexible flat wiring harness was used instead of the traditional wiring harness, the overall weight of the single wiring harness could be reduced by about 50%, and the volume could be reduced by about 60%; if the electronic module, switch and FPC wiring harness were integrated, the use of connectors and accessories could be reduced, and the cost could be further reduced.
At present, the FPC power battery represented by Tesla has been recognized by the market, and in the future, the power battery and manufacturers will jointly promote the large-scale introduction of FPC.
Automotive Intelligence #3: Millimeter-wave radar and lidar, as key components to realize ADAS, will drive the development of automotive PCB boards to high-end products with greater value.
The realization of ADAS system functions requires the cooperation of multiple sensors such as cameras, millimeter-wave radars, lidars, and ultrasonic radars.
At present, the mainstream models on the market that support L2-L3 ADAS functions are generally equipped with about 23 sensors, and Yole estimates that the number of sensors needs to reach more than 38 to achieve L5 ADAS.
As can be seen from the teardown of the Bosch MMM1Crn millimeter-wave radar, Valeo SCALA lidar and ZFS-CAM4 trinocular and monocular cameras, all kinds of sensors require PCBs as loads, especially millimeter-wave radar and lidar, as well as high-frequency PCBs and high-density HDI boards, which are more difficult to process and have higher value. In the future, as ADAS moves to a higher level, the increase in the number of sensors will lead to a massive increase in the volume of high-end PCBs.
Automotive Intelligence #4: The multi-screen and large-screen intelligent cockpit increases the demand for high-performance PCBs such as HDI boards.
The intelligent cockpit is the key to realize the interaction between people and vehicles, and the PCB is the essential basic component of the display backlight module in the display. Compared with the traditional cockpit, the trend of multi-screen and large-size display in the intelligent cockpit has been formed. With the development of automotive intelligent cockpits, the average number of vehicles and the size of on-board displays will continue to increase, so PCB boards are required to have higher wiring density, narrower line width and line spacing, and stricter design and processing technology, which is expected to drive the volume and price of high-performance PCB boards.
Market space: Global automotive PCB output value will reach $12.8 billion in 2026E, CAGR 8% during 2022-2026E
According to Prismark's forecast, the global automotive electronics PCB output value will be about 9.35 billion US dollars in 2022 and will reach 12.772 billion US dollars in 2026, with a CAGR of 8% in 2022~2026, which is higher than the overall growth rate of PCB. We estimate that the CAGR of automotive PCB value in China in 2023-2025E will reach 19%.
Rigid boards: Acquired Multek to fill the rigid board gap
In July 2018, DSB acquired Multek, a PCB manufacturing entity under Flex International, to fill the gap in rigid boards and complement Mflex's advantages in products, technology and operations. In 2022, Multek's operating income reached 4.65 billion yuan and its net profit was 105 million yuan.
In terms of downstream, according to Dongshan Precision's investor research minutes (2021/11/04), in 2021, Multek's consumer electronics customers accounted for about 20%, data communication and communication customers accounted for about 40%, automobiles accounted for about 10%, and the rest were industrial control and medical customers. In recent years, the company has vigorously developed the automotive PCB business and increased the development of automotive customers.
Since the acquisition, the company has entered the high-end HDI sector, and in 2020, it reached a long-term strategic cooperation intention with Shenzhen Guangyunda Optoelectronics Technology Co., Ltd. on HDI processing. In addition to a series of technical transformations to the original Multek production line, in 2022, the company will launch the Chaowei Microelectronics IC Substrate project to broaden the electronic circuit product system.
Flexboard: Product iteration and upgrading accelerated, and the value of bicycles continued to increase
The intelligence, integration, and lightweight of new energy vehicles have promoted the market demand for on-board FPCs. DSBJ continues to promote iterative product upgrades, and is extending to the downstream CCS (Cells Contact System) integration in addition to the empty board without soldering devices. At the same time, the value of flex bikes continues to increase, with an empty ASP of about $30, while a CCS module ASP is expected to reach $200-300.
At the same time, due to the length of automotive flexible boards can reach 1-2 meters, there is a large gap with consumer electronics, the company has launched projects such as new energy flexible circuit boards and assembly of Yancheng Weixin Electronics, and actively expanded related production capacity. According to the company's disclosure, the current automotive flexible board is still in its infancy, with the proportion of empty board as high as about eighty, and the business is still in a period of rapid growth, with broad space for future development.
Precision structural parts: master the core technology, and deeply participate in major customer 4680, body-in-white and other projects
Tesla's product manufacturing process is complex, and DSB Precision is deeply involved in its body-in-white, 4680 battery and other projects. Specifically, the company's products can be divided into body-in-white structural parts, battery structural parts (explosion-proof valve + housing + tray), heat sink parts, die-casting parts (three-electric shell), etc.
The body-in-white is an unpainted welded assembly of structural parts and covers of the body, including front wings, doors, bonnets and trunk lids. At present, affected by factors such as emission policy requirements and range anxiety of new energy vehicles, automobile lightweight has become a trend, and integrated die-casting body has become an ideal technical path.
In September 2020, Tesla announced the application of an integrated die-casting process to the rear floor of the Model Y, opening a precedent for integrated die-casting. Due to the larger volume of body-in-white die castings and high process barriers, the four major processes of stamping, welding, painting and assembly are applied in a unified manner, and because of the technical difficulty of aluminum alloys, the processing costs such as riveting are high, which requires a large amount of upfront capital investment and industrial chain cooperation. With decades of experience in precision metal processing technology, DSB Precision has been able to supply small body-in-white parts to Tesla, and is continuing to expand medium and large parts.
The 4680 battery is a new generation of cylindrical batteries with a diameter of 46mm and a height of 80mm launched by Tesla in 2020 based on the Panasonic 2170 small cylindrical battery. DSBJ mainly expands battery structural parts, including battery cell structural parts and battery pack structural parts.
1) In terms of battery cells, the explosion-proof valve has the functions of breathability, waterproof, explosion-proof, etc., with high assembly accuracy requirements and large fracture pressure of the weld, while the shell is used to accommodate the bare battery cell and provide support and enhance the strength of the shell, which needs to meet the dimensional consistency and excellent thermal diffusion. At present, the company's explosion-proof bonnet is being supplied in batches, and the shell has been sent to samples;
2) In terms of battery pack structural parts, the company focuses on battery trays, which are used to improve the impact resistance of batteries and the torsional rigidity of the body.
The battery cooling system of new energy vehicles mainly includes important components such as battery coolers and water cooling plates, which help power batteries quickly cool down, ensure safe use, and reduce overall energy consumption. The raw material selection of radiator is harsh, integrating anti-static, fireproof, moisture-proof and other functions, and the product has high requirements for accuracy and consistency.
The company has served communication equipment customers in the past, so it has experience in the production of high-frequency and low-loss heat dissipation functional parts, and is able to transfer the technology to the automotive industry.
The company has supplied the central control water cooling plate after the driving computer, and has now covered a full range of models and achieved batch supply. In the future, the company will actively continue to expand other water-cooled plate products.
The die-casting parts supplied by DSB Precision are mainly three-electric shells, including battery shells, motor shells, electronic control shells, etc. Power battery, drive motor, electronic control system collectively known as the three electric system, is the core component that determines the performance of new energy vehicles, the lightweight of the three electric shell and the application of aluminum alloy is an important direction to achieve the lightweight of the vehicle.
Photoelectric display: In 2023, Suzhou crystal terminal will be consolidated and actively expand the field of on-board display
The improvement of the intelligence, visualization and entertainment of new energy vehicles has driven people's demand for human-vehicle interaction, and the trend of color LCD instrument panel replacing mechanical instruments is obvious, which is the core benefit of key interaction of intelligent cockpit.
According to Omdia, global automotive display shipments in 2021/2022 will reach 183/195 million pieces, corresponding to 2.4 bicycle screens in 2022. With the rapid popularization of new energy vehicles, large-screen, multi-screen, and high-definition on-board displays have become a new development direction. We estimate that by 2030, more than 300 million automotive displays will be shipped worldwide.
In October 2022, the company acquired 100% of the equity of Crystal End Display Precision Electronics (Suzhou) Co., Ltd. from Japan Display Inc., and in January 2023, the company completed the equity closing. JDI is a world leader in the LCD field by integrating the LCD panel business of Toshiba, Sony, Hitachi and Panasonic, and Suzhou Jingduan, as its wholly-owned subsidiary in China, is one of the world's top five automotive display module factories, mainly serving traditional car manufacturers, covering the world's top 10 tier1 manufacturers, with revenue of about 3.2 billion yuan from January to November 2022. After the completion of the transaction, DSB Precision has increased its on-board display business, which is conducive to the combination of the original touch module technology and display technology.
Financial analysis: Steady growth in revenue from core businesses, and continued capital expenditures to support long-term expansion
The revenue of the core business grew steadily, and the gross profit margin was relatively stable
It shows that the business dragged down the performance in 2022, and the core business grew steadily. From 2016 to 2019, the PCB business accounted for a rapid increase in the proportion of the company's revenue, and has remained above 60% since then.
From 2019 to 2022, the company achieved revenue of 235.5/280.9/317.9/31.58 billion yuan respectively, with a CAGR of 10.27% from 18 to 22 years.
In 2022, due to the recession in the terminal market, the revenue of the two major businesses of touch panels, LCM modules and LED display devices decreased significantly, resulting in a decline in revenue in 2022.
In 3Q23, the company adjusted the proportion of non-core business, reduced LED-related investment, maintained performance resilience, and will focus on the two core tracks of consumer electronics and new energy in the future.
The company's gross profit margin is relatively stable, and the gradual recovery of the LED industry is expected to drive the recovery of gross profit margin.
From 2019 to 2022, DSB's gross profit margin was 16.3%/16.3%/14.7%/17.6%, respectively, with certain fluctuations but overall stability.
In 2021, the company's gross profit margin decreased by 1.6 pct, mainly due to repeated epidemics, rising commodity costs, and fierce product price competition.
In 2022, the company's gross profit margin increased by 2pct as the pressure on upstream raw material prices gradually eased, foreign exchange earnings increased under exchange rate fluctuations, and the proportion of printed circuit board revenue with higher gross profit continued to increase.
Since the end of 2021, the consumer electronics terminal boom has been sluggish, the price of the optoelectronic field has been under pressure, and the gross profit margin of the touch panel and LED business has declined. In 1H23, the gross profit margin of the LED business decreased by 59.56 pct year-on-year due to weak market demand, sales volume and price decline, insufficient capacity utilization rate, and significant increase in unit fixed costs.
In the future, as the LED industry gradually recovers, we believe that the gross profit margin is expected to gradually recover.
Benefiting from the steady growth of operating income, the improvement of gross profit margin brought about by the optimization of product structure, and the good control of expenses during the period, the company's net profit attributable to the parent company reached 7.0/15.3/18.6/2.37 billion yuan from 2019 to 2022, with a CAGR of 49.9% in 18-22. Through a series of internal reforms and quality and efficiency improvement, the company's cost control was excellent, and the expense ratio was continuously reduced during the period.
Among them, the sales expense ratio decreased from 1.84% in 2019 to 1.12% in 3Q23, the administrative expenses remained below 3%, the financial expenses decreased year by year, and the financial expense ratio in 3Q23 was 0.2%, and the overall R&D expenses showed an increasing trend and remained stable at about 3%.
The capital mix tends to improve, with continued capital spending supporting long-term growth
The company's solvency has improved, and the debt structure tends to improve. From 2019 to 2022, the company's current ratio and quick ratio have increased year by year, and the current ratio has remained above 1.1 since 2020. At the same time, the company's asset-liability ratio in 19-22 years was 72.5%/64.9%/61.3%/59.5%, showing a downward trend year by year.
The reasons for the company's high asset-liability ratio are: 1) electronic circuit board is a capital-intensive industry, which requires a lot of manpower, R&D, and project construction costs; 2) The company continues to develop new tracks through mergers and acquisitions.
"Debt reduction, structural adjustment, and stable operation" is the company's long-term business strategy, and the company optimizes its capital structure and reduces debt risks by virtue of non-public issuance of shares, convertible bonds and stable operation.
In addition, the company's continuous capital investment in many fields such as new energy vehicles, next-generation display technology and emerging consumer electronics products is expected to lay the foundation for the company's subsequent production capacity and revenue scale improvement.
Risk Warning
Competition in the industry has intensified. Suppressed by various uncertain factors, there is no corresponding growth in the total demand of the market, there may be a local, some varieties, a certain period of time of surplus, that is, the market capacity digestion period, there will be price reductions and orders, the competition situation will be extremely fierce.
Raw material prices fluctuate. The company's main raw materials involve copper, resin, etc., affected by commodity prices, raw material price fluctuations and supply-demand imbalances bring greater uncertainty risks to the company's production costs and production and operation.
Capacity ramp-up and technology upgrades have been slower than expected. If the company's production scale cannot be effectively expanded, product quality and performance can not be effectively improved, the company will face greater market competition risks, which will have an adverse impact on production and operation.
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The report comes from [Foresight Think Tank]