1H23 performance fell short of our expectations

The company announced 1H23 results: revenue of 27.85 billion yuan, +17.9% year-on-year, net profit of 1,904 million yuan, +13.7% year-on-year, net profit of 1,903 billion yuan after deducting the influence of central control, of 1,903 billion yuan, +7.40% year-on-year. 2Q23 revenue was 12.11 billion yuan, -6.1% year on year, -23.1% month on month, net profit after deducting central control of 770 million yuan, -25.1% year on year, and -32.6% month on month, below our expectations. Mainly due to the impact of the pace of sales of photovoltaic power plant assets by Zhengtai New Energy Company, 2Q23's performance contribution declined year on year.

By sector, according to the company's performance, 1) the low-voltage electrical appliance business 1H23 revenue was 11.475 billion yuan, +7% year on year, net profit was 1 billion yuan, +15.9% year on year, gross profit margin 27.4%, up 2.2ppt year on year, 2Q23 net profit after deducting the influence of central control was 459 million yuan, with a year-on-year growth rate of over 30%; 2) New energy business, 1H23 revenue was 16.621 billion yuan, +26.2% year on year. Net profit after deducting the impact of central control was 903 billion yuan, +11.4% year on year. 1H23 had revenue of 13.7 billion yuan, +274% year-on-year, net profit of 1,202 billion yuan, +64% of the same period, 5.4 GW of additional household installed capacity, +99% year-on-year, and sales of 3.86 GW of power plants. Looking at 2Q23, the profit of new energy was 320 million yuan, or -51% year-on-year, which mainly contributed a lot of profit to sales of ground and industrial and commercial assets during the same period. 1H23 Zhengtai Power's revenue was 916 million yuan, +86% year-on-year, and inverter energy storage is growing strongly.

Development trends

Profits for low-voltage appliances are gradually recovering, and direct sales and international business continue to grow at a high level. The gross profit margin of the company's 1H23 low-voltage appliances was 27.4%, an increase of 2.2 ppt over the previous year, and a gross margin increase of 0.3 ppt compared to FY22. We estimated that in 2Q23, the net interest rate for low-voltage appliances was 8.9%, +1.9ppt year on year, +0.3ppt month-on-month, and profitability was restored on a month-on-month basis. We believe it is mainly due to reduced procurement costs, improved operational efficiency, and large-scale cost reductions. Looking at the breakdown, according to the company's performance, 1H23's domestic distribution channel business revenue fell 5% + year on year, domestic industry direct sales revenue was +47.6% year on year, and international business revenue was 2.119 billion yuan, +29.14% year on year.

The household photovoltaic market is expanding, and the company maintains the annual 12GW+ development volume guideline. As the price of components fell from 2 yuan/watt to 1.2-1.3 yuan/watt, increasing yields boosted market expansion, Jiangxi/Jiangsu/Fujian/Hui/Hunan/Shaanxi/Guangdong added 1.15/1.22/0.46/0.46/0.53/0.37/0.23GW in 2Q23, +178% ~ +1265% over the same period. We expect the number of GW provinces to rise from 6 in '22 to 12. The company added 5.4 GW of installed capacity in 1H23, +99% year-on-year, and the grid-connected caliber share declined, mainly due to the influence of some local policies. According to the company's performance, with the expansion of the company's emerging markets, the company's share returned to 29% in June, and the company maintained the annual development volume guidelines of 12 GW or more.

Profit forecasting and valuation

Considering the low-pressure revenue growth trend and the decline in non-recurring revenue in '23, we lowered our 2023/2024 net profit by 10%/7.8% to $46.6/5.48 billion. Maintaining an outperforming industry rating, the target price was lowered by 10% to 36.9 yuan, corresponding to a price-earnings ratio of 17/14.4 times in 2023/2024. There is an upward margin of 48.9% compared to the current stock price. The current stock price corresponds to 11.4/9.7 times P/E in 2023/2024.

risks

Macroeconomic recovery fell short of expectations, demand for household photovoltaics fell short of expectations, and market competition worsened.