Performance review

1H23's performance fell slightly short of our expectations

The company announced 1H23 results: 1H23 revenue/net attributed/net profit minus non-net profit of 6531/2.80/225 million yuan, year-on-year, +6.8%/+38.1%/+0.6%; of these, 2Q23 revenue/net profit attributed/net profit deducted from non-net profit of 32.36/1.17/121 million yuan, year-on-year +7.8%/+12.3%, -1.8%/-28.8%/-0.02%. The performance is slightly lower than our expectations. We think the lead recycling business may be dragging down profits.

Development trends

The share of the lead-acid business continues to rise, and we are optimistic that 2H23 volume will increase steadily. Benefiting from a rise in front-end demand for 1H23 commercial vehicles, the superimposed rear-end market demand was strong, and according to the company's 1H23 performance report, the company's share increased from 29.5% in 2022 to 31.0%. Overall shipments of the company's 1H23 lead-acid batteries reached 16 GWh, +12.3% year-on-year, achieving revenue of 4.979 billion yuan and +10.5% year-on-year. Of these, 2Q23, we estimated revenue of 2.5 billion yuan and shipments of 8 GWh+, which was basically the same; in terms of profit, we estimated 1H23 lead-acid business gross profit margin of about 20.5%, of which Q23 It is expected to be maintained month-on-month, with 1H23's profit contribution of about 400 million yuan. Looking ahead to 2H23, the auto market has entered the traditional peak sales season, which is expected to drive improvements in front loading shipments season by season. We are optimistic that the high boom in the aftermarket will continue. We are optimistic that the company will continue to expand its market share with brand advantages, while overseas business will benefit from Malaysia's production capacity release and continued growth. We expect lead-acid business shipments to increase step by step and profit levels to continue to improve.

Low-voltage lithium batteries continue to gain new customer targets, and they are optimistic that mid-term emissions will drive profit improvement. 1H23's low-voltage lithium battery business continues to increase its efforts to develop new customers. With the reuse of lead-acid business channels, it has successively obtained 17 designated points from Geely and FAW, etc., but due to the cycle from order to mass production, the current scale of low-voltage lithium batteries is still small and is still in the investment period. We expect 1H23's low-voltage lithium battery business to still lose money. Looking back, the company is expected to build 2 million units during the year to support mid-term business growth. We expect that with the release of the new downstream vehicle cycle in 2024-25, the company's low-voltage lithium battery business will usher in an improvement in performance.

The price of lithium carbonate has stabilized, and we are optimistic that the domestic energy storage market will pick up 2H23. In terms of large storage/industry and commerce, the company's 1H23 was affected by fluctuations in lithium carbonate prices, and on-hand order delivery slowed down. We expect 3Q23 revenue to be gradually confirmed. Looking ahead to 2H23, we expect the price of lithium carbonate to stabilize in stages, domestic market installations and tenders are expected to pick up, and orders in the company's energy storage business are expected to be released steadily.

Expenses increased year-on-year during the period, and gross margin may be dragged down by the lead recycling business. The company's cost rate for the 1H23 period was +0.6ppt year on year, mainly due to 1) the increase in lithium battery R&D expenses and the R&D cost rate +0.4ppt year on year; 2) the increase in employee remuneration and advertising expenses, and the sales cost rate +0.3 ppt year on year. Furthermore, the company's gross profit margin in 2Q23 was 14.0%, down 1.2ppt from the previous month. We think it may be hampered by the lead recycling business.

Profit forecasting and valuation

Considering weak automobile consumption and the lack of significant improvement in lithium battery and lead recycling performance due to macroeconomics, we lowered our 2023/24 profit forecast by 15%/10% to 802/1,111 million yuan, and we lowered our target price by 7.8% to 10.6 yuan, maintaining the outperforming industry rating. The current stock price and target price correspond to 11.9x/8.6x P/E and 15.6x/11.2x P/E in 2023/24, respectively. There is room for a rise of 30.1%.

risks

China's automobile production and sales fell short of expectations, domestic demand for energy storage fell short of expectations, and the macroeconomic economy declined.