Description of the event

Fara Electronics announced its 2023 annual report. In the first half of the year, the company achieved revenue of 1,972 million yuan, an increase of 11.83% over the previous year; net profit of 491 million yuan, an increase of 13.67% over the previous year. Net profit not attributable to parent was 509 million yuan, an increase of 18.22% over the previous year.

Investment income from non-recurring profit and loss from transactional financial assets other than normal hedging -- 27 million yuan. Affected by the inventory removal actions of customers in the photovoltaic sector since June, the company's short-term orders have declined. It is expected that with the completion of downstream depots in the middle and latter stages of Q3, orders are expected to pick up. The company's revenue for the second quarter was 1,042 million yuan, up 12.16% from the previous quarter; the gross profit margin was 39.77%, up 2.12 pct from the previous month, and the net interest rate was 25.13%, up 0.24 pct from the previous month.

Incident comments

The company is located in the upstream new energy sector. Benefiting from orders from booming industries such as downstream new energy vehicles, photovoltaics, and wind power, it achieved relatively rapid growth in the first half of the year. According to the latest data from the Clean Technica website, in the first half of this year, global NEV sales reached 5.832 million units, an increase of 40.2% over the previous year, and a market share of 15%. According to data released by the China Association of Automobile Manufacturers, in the first half of 2023, production and sales of new energy vehicles reached 3.788 million units and 3.747 million units respectively, up 42.4% and 44.1% from the previous year. According to data from the National Energy Administration, in the first half of 2023, China added 78.42 GW of photovoltaics connected to the grid, of which 37.46 GW of centralized photovoltaic power generation was added to the grid, and 40.96 GW of distributed photovoltaics (of which 21.52 GW of household photovoltaics). It is undeniable that in the process of implementing long-term industrial trends, the company has experienced short-term fluctuations in Q1 NEV orders and Q2 PV orders. We believe this will not change the space for increased penetration of electric vehicles and increased PV installed capacity. As an industry leader, the company will benefit in the long term.

Judging from the second quarter, the company's gross margin level was better than previously anticipated, mainly due to the company's scale effect and leading technical level. In an environment where industry competition is becoming more intense and product prices are under pressure, the company achieved cost reduction and efficiency through various methods such as increased production efficiency, improved product yield, and improved material utilization, which well maintained the overall profit level. This is also one of the company's competitive advantages as an industry leader.

We believe that the company has been following a lot of adjustments in the photovoltaic sector recently, but the company's position in the industry is stable, capital expenditure remains high, and the foundation for rapid growth in the medium to long term is solid. The company's net profit for 2023-2025 is expected to be 1,104 million yuan, 1,265 million yuan, and 1,520 billion yuan, respectively. The corresponding PE is 23.58 times, 20.59 times, and 17.12 times, respectively, and continues to be optimistic.

Risk warning

1. The risk that demand falls short of expectations;

2. Risk of cost fluctuations.