Matters: The company released its 2022 semi-annual report, with 22H1 operating income of 540 million yuan, -9.0% year on year, net profit of 80 million yuan, -12.1% year on year; after deducting net profit of non-return mother's net profit of 60 million yuan, -23.1% year on year. Among them, Q2 revenue was 250 million yuan, -18.8%/-10.7% compared to the same month; Q2 deducted net profit of 0.4 billion yuan from the same period, which was -13.5%/+48.1%, respectively. 22H1 sales gross profit margin was 28.2%, compared to 21H1-5.0pp, and -2.6pp/-1.0pp compared to 22H1-5.0pp and 22Q1 respectively.
Shipments of downstream flat screen TVs have declined, but the company's share of reflective films remains the highest in the world. According to Trendforce Jibang News data, 22H1 shipped 92.43 million flat screen televisions worldwide, -6.6% year on year. The main reason was the contraction in global consumer electronics demand. According to the company's 21-year report, the product that accounts for the highest revenue share is reflective film (79.5% of revenue in '21), and its downstream applications are mainly in the field of flat screen televisions. Affected by downstream demand, the company's 22H1 reflective film revenue also declined year-on-year, but according to the company's interim report, its reflective film shipping area still ranked first in the world, showing the share resilience of its fist business. Furthermore, it is important to note that in the new Mini LED application and the small to medium size field, the company's reflective film shipments increased during the reporting period, effectively hedging the impact of the overall contraction in demand.
The decline in gross margin has narrowed, and the profitability of optical substrates is under short-term pressure. During the reporting period, the company's gross profit margin was 28.2%, compared to 21h1-5.0PP and -2.6pp/-1.0pp for the full year of 22/22q1 respectively. The decline narrowed slightly, indicating that the impact of rising raw material prices on gross margin weakened marginally. On the other hand, considering that the company's optical substrate business is still concentrated in the middle and low end markets where prices are fiercely competitive, its profitability is under pressure in the short term when downstream demand shrinks sharply. The company has also partially hedged the decline in optical substrate profit margins through strategies such as increasing the proportion of optical pre-coated films and switching to solar backsheet substrate substrates. The overall market for optical substrates is large. The company's Hefei production line focuses on middle and high-end markets such as polarizer separation films and MLCC release films. It is believed that the overall profitability of the optical substrate film business is expected to continue to improve with the subsequent shipment of high-end products.
The inventory scale is growing rapidly, and the lithium battery separator business is worth looking forward to. By the end of the 22H1 period, the company's inventory was 290 million yuan, which was growing faster than +81.2% at the end of '21. By category, of these, inventory was 200 million yuan, up 124.7% from the beginning of the period; raw materials were 60 million yuan, an increase of 96.6% from the beginning of the period. We judge that the decline in downstream demand led to unurgent shipping expectations and the rise in raw materials at the beginning of the period compared to increased stocking by companies. In the lithium battery diaphragm business, the company's annual production project of 560 million square meters is expected to be sampled and tested in Q3. Given the huge market space of the diaphragm track and the cost advantage of the company's self-assembled production line, the growth of this business is worth looking forward to.
Profit forecasts and investment recommendations. As a leading global reflective film company, the company has accumulated extensive technology. In the long run, it is expected to replicate successful experiences of reflective films in high-end domestic substitution of optical substrates and independent assembly and production of lithium battery diaphragms, thus driving continuous growth in performance. The company's net profit from 2022-2024 is expected to be 2.2/28/34 million yuan respectively, and the compound growth rate for the next three years is 21.9%. The corresponding PE valuation is 23 times/18 times/15 times, respectively, maintaining the “buy” rating.
Risk warning: The development and introduction of new products falls short of expected risks, increased competition in the industry brings the risk of falling prices, and there is a risk that downstream consumer electronics demand will continue to decline sharply.