Event: Sunrise Oriental released its mid-2023 report. The company's 2023H1 realized an income of 2.06 billion yuan, while YoY+19%; realized a net profit of 90 million yuan, a loss of 20 million yuan in the same period last year, and a non-return net profit of 60 million yuan, compared with a loss of 50 million yuan in the same period last year. In a single quarter, the income of 2023Q2 is 1.19 billion yuan, the net profit of YoY+9%; is 100 million yuan, and the net profit of YoY+169%; is 80 million yuan, YoY+195%.

The company's heat pump business continues to grow, leading to sustained revenue growth. The domestic market of heat pump this year is significantly faster than that of last year, and we believe that the heat pump business will further bring revenue and profit flexibility to the company.

Air can drive sustained revenue growth: according to industry online data, 2023M1-5 Chinese heat pump domestic sales / export sales respectively YoY+18%/31%,2022 domestic heat pump market growth rate of 6%, the growth rate has increased month-on-month since the beginning of this year. Sub-business point of view: 1) the company's air energy heat pump business is sold both at home and abroad, and the overall income continues a high growth trend. We estimate that the growth rate of Sunrise Oriental 2023Q2 air energy revenue is more than 50% year-on-year, which is the main driver of the company's revenue growth. 2) the company's solar hot water business still accounts for the largest share of the company's revenue, and with the recovery of domestic consumption so far this year, we estimate that 2023Q2's solar water heater revenue still grew slightly compared with the same period last year. 3) We believe that the company's kitchen and electricity business is affected by real estate policy changes or short-term pressure, but the overall operation is sound. 4) Photovoltaic and energy storage business is the company's second growth curve besides heat pump, and the business is still in the investment stage.

With the emergence of the trend of integration of photovoltaic and thermal storage, we expect that the synergy between photovoltaic and energy storage and the company's heat pump business will be further reflected.

Q2 single-quarter profitability improvement: Sunrise Oriental Q2 gross profit margin year-on-year + 1.4pct, the main reasons are: 1) the price of the company's main raw materials decreased compared with the same period last year; 2) the scale effect of the company showed an increase in the self-yield of superimposed parts, which led to an increase in the gross profit margin of heat pump products.

The company's net interest rate is + 5.0pct year-on-year, which we think is mainly due to the internal cost reduction and potential increase, and the sales expense rate is significantly lower than that of last year.

Q2 operating cash increased slightly: Sunrise Oriental Q2 net operating cash flow was + 50 million yuan compared with the same period last year, and the company's operating cash flow improved slightly with revenue growth. The net cash flow generated by the company's fund-raising activities was + 350 million yuan compared with the same period last year, mainly due to the increase in short-term loans to banks in order to supplement working capital.

Investment suggestion: Sunrise Oriental Air Energy business is developing rapidly, the proportion of air energy heat pump revenue is increasing, and the pulling effect of heat pump business on the company's revenue and profits will be further revealed. The company's photovoltaic and energy storage business makes full use of the customers and channels of the original photothermal business to form a synergy with heat pump products, which is expected to continue to promote the rapid growth of the company's revenue together with heat pump. We estimate that the company's EPS in 2023 to 2024 will be 0.58 RMB, and the 6-month target price will be 7.54 yuan, corresponding to 13 times PE in 2023, maintaining the buy-An investment rating.

Risk hint: raw material prices rise, subsidy policy is lower than expected