1H23 performance is lower than we expected.

The company announced 1H23 results: revenue 1.578 billion yuan, year-on-year-19.51%; return to the mother net profit 254 million yuan, year-on-year-48.90%; deduction of non-net profit 244 million yuan, year-on-year-49.73%, the company performance is lower than we expected, mainly due to downstream customer demand has yet to recover, component product sales decline. In a single quarter, 2Q23's revenue was 936 million yuan, year-on-year-16.21%, month-on-month + 45.95%; net profit returned to its mother was 127 million yuan,-57.91% year-on-year, and + 0.75%.

Trend of development

Downstream demand has yet to recover, and 1H23 performance is under short-term pressure. 1) the components / trade / new materials sectors of 1H23 achieved revenue of 656 million yuan / 840 million yuan / 77 million yuan respectively, compared with the same period last year. 22.81%, 20.90%, 107.51%, respectively. Downstream customer demand has yet to recover, consumer customers are still in the inventory digestion cycle, and the company's 1H23 performance is under short-term pressure. 2) 1H23's gross profit margin / homing net profit margin is respectively from-3.9ppt/-9.2ppt to 39.4% and 16.1% compared with the same period last year, mainly because the downstream demand of the company has yet to recover and the company adjusts the prices of some products.

Research and development expenses continued to grow, and cash flow improved compared with the same period last year. 1) during the period of 1H23, the expense rate was + 5.55 ppt compared with the same period last year, and the sales / management / R & D expense rate increased in varying degrees, of which R & D expenses increased by 25% to 58 million yuan over the same period last year. 1H23's wholly owned subsidiary Liya invested about 28 million yuan in R & D, an increase of 135.72% over the same period last year, continuously consolidating the company's leading position in the field of high-performance special ceramic materials.

2) the cash flow of the company's 1H23 business activities ranges from + 10.03% to 570 million yuan compared with the same period last year, mainly due to the reduction of cash payment and taxes paid in the current period.

Share buyback shows long-term confidence, and industrial capacity building is progressing steadily. 1) as of July 30, 2023, the company has repurchased 476312 shares of the company, with a corresponding amount of 15 million yuan; this repurchase plan intends to repurchase 30,050 million yuan of company shares for the implementation of the employee stock ownership plan. 2) during the reporting period, the company actively promoted industrial capacity building, and components: Shanghai Torch Group acquired a 51% stake in Xiamen Core I with 174 million yuan, helping the company to complete the leap from passive components to active power devices. New material plate: the company has completed the construction of liquid PCS production line, and the industrial investment fund that the company participates in has completed three targets with a total industrial investment of 38 million yuan, aimed at fostering downstream high-quality ceramic matrix composite targets. We believe that the share buyback plan fully demonstrates the company's confidence in long-term development, and with the continuous promotion of the company's industrial layout, the company is expected to further open up long-term growth space.

Profit forecast and valuation

Taking into account the pace of downstream demand release, we downgrade 2023 Universe's earnings forecast of 38.9% for 2024 to RMB 598 million, and the current share price corresponds to 22.3 times the price-to-earnings ratio of 26.5 for 2024. In the recent downward valuation center of the industry, we believe that the company is expected to usher in an economic inflection point. We lower our target price by 15.1% to 43.68 yuan, corresponding to the price-to-earnings ratio of 33.5 times earnings for 2023 Universe in 2024, maintaining an outperforming industry rating with a potential increase of 27%.

Risk

1) the progress of capacity construction and production is not as expected; 2) the product delivery is not as expected.