1H23 performance is in line with market expectations
The company announced 1H23 results, achieving revenue of 11.938 billion yuan, -8.7% year-on-year (adjusted caliber); net profit of 1,782 billion yuan, year-on-year ratio of -49.7% (adjusted caliber), corresponding to profit of 1.53 yuan per share, in line with market expectations. Of these, 2Q23 achieved revenue of 6.209 billion yuan and net profit of 780 million yuan.
The company's revenue declined year-on-year during the reporting period. We believe it was mainly due to falling prices of industrial silicon and silicone. 1H23 gross profit margin was 26.7%, down 14.9ppt year on year. In terms of expenses during the period, sales expenses/management expenses/financial expenses increased by 7.2%/14.3%/114.4%, respectively. The increase in financial expenses was mainly due to an increase in interest expenses due to new loans. On the balance sheet side, the company's projects under construction increased to 27.88 billion yuan at the end of the second quarter, mainly due to the commencement of construction of many projects in central Hesheng.
Development trends
Supply and demand for industrial silicon and silicone are weakening, and the short-term industry may continue to fluctuate at the bottom. The average price of industrial silicon in 2Q23 was 1.5 million yuan/ton, down 24% year on year and 17% month on month. The decline basically stopped and stabilized after mid-June.
On the supply side, the output of the entire industrial silicon industry reached 1,946,000 tons in January-July, an increase of 5.8% over the previous year. This is mainly due to Hesheng's contribution to additional production capacity last year, followed by Inner Mongolia's increase. On the demand side, only polysilicon is growing strongly among the three downstream, and the trend of silicone and silicon-aluminum alloys is weak, making it difficult to absorb the additional production capacity. At current prices, small and medium-sized enterprises in southwest and other regions may already be facing losses. On the other hand, the average price of 2Q23 silicone was 14,700 yuan/ton, down 42% year on year and 14% month on month. Considering the 2022 capacity expansion ~ 30%, it may take a long time to digest excess production capacity.
Continue to increase capital expenditure and increase the new energy industry. As of 1H23, the company's industrial silicon production capacity was 1.22 million tons/year, and the silicone monomer production capacity was 1.73 million tons/year. The company also disclosed the progress of key projects. Among them, the 200,000 ton polysilicon project in central Hesheng is expected to be put into operation one after another in 3Q23, 200,000 tons of polysilicon in Eastern Hesheng is expected to be put into operation one after another on 1Q24, the 20 GW photovoltaic module project in Central Hesheng is expected to be put into operation one after another in 4Q23, 1.5 million tons of photovoltaic glass in Central Hesheng is expected to be put into operation one after another in 3Q23, and the integrated project in Hesheng in Yunnan is expected to be completed in 2024.
Profit forecasting and valuation
The industry boom is declining. We lowered our 2023/24 profit forecast by 42%/22% to 475/8.22 billion yuan. The current stock price corresponds to a price-earnings ratio of 16/9 times 2023/2024. Considering the decline in performance and the industry cycle currently at the bottom, we lowered the company's target price by 23% to 85 yuan, corresponding to 21/12 times the 2023/2024 price-earnings ratio. There is 37% room for improvement compared to the current stock price, maintaining an outperforming industry rating.
risks
The macroeconomic economy is declining; silicone production is expanding at an accelerated pace; the progress of the company's projects has fallen short of expectations.