Dahe called to buy Dongyang (1319), with a target price of 58 yuan.

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[Financial Channel/Comprehensive Report] Daiwa Securities (Daiwa) reported that Dongyang (1319), an auto parts factory, is expected to benefit from increased demand for AM (after-sales maintenance) and the trend of electric vehicles. After a strong 2022, AM-related Business income is still expected to maintain growth. Chinese OEM (Original Manufacture) is expected to deliver US electric vehicle orders in Q2. Reiterate "buy" Dongyang with a target price of 58 yuan.

Although Dongyang's Q4 revenue in 2022 is slightly lower than expected due to client inventory digestion, Daiwa expects that Q1 single-quarter revenue will grow in 2023 and become more clear in 2023.

Daiwa also expects the gross margin expansion trend to continue until 2023-24.

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Management is targeting aftermarket revenue growth of 8% in 2023, thanks to rising auto sales and support from U.S. insurers.

In terms of OEM business, Dongyang aims to achieve 2.5% and 5-10% revenue growth in Taiwan and China, respectively.

Potentially higher capacity utilization should boost Dongyang's gross margin by 0.5-1ppt, with operating expenses as a percentage of sales of 14-14.5%.

Looking at the short-term outlook, for Q1 in 2023, Daiwa expects Dongyang's revenue to grow due to the peak season, because Q4 revenue in 2022 may be weaker than expected, and the base in the same period in 2022 is low.

In the medium and long term, due to the increase in the total number of vehicles in the world and the extension of life expectancy, Daiwa noticed that Dongyang's stock price is relatively easy to outperform other companies during the down cycle; in addition, Dongyang will also benefit from the trend of electric vehicles.

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