Performance in the first half of the year is still under pressure, and they are optimistic about improving the product structure under the high-end strategy
The company's 1H23 revenue was 2.08 billion yuan (YoY: -2.0%), and net profit was 85.07 million yuan (YoY: -76.9%). 2Q23 revenue was 1.14 billion yuan (YoY: 12.4%; QoQ: 22.3%), net of non-net profit of 36.38 million yuan (YoY: -55.6%; QoQ: 14.2%). Thanks to the removal of industry inventories, the superposition company strengthened market development, and Q2 revenue rebounded month-on-month; net profit was improved month-on-month but under year-on-year pressure, mainly due to low MLCC price operation affecting Q2 gross margin performance. Currently, insufficient consumer demand is compounded by market competition, and the sustainability of industry price recovery remains to be seen; however, the supply-side inflection point has passed, and the number of days the company's inventory turnover continues to decline after peaking in 2Q22. It is recommended to focus on the pace of gross margin restoration and the results of high-end strategies. Net profit for 23-25 is predicted to be 3.6/64/860 million yuan. Considering Fenghua's high-end production capacity expansion and the introduction of strategic shareholders to optimize corporate governance, the company was given 30x expected PE in 24 (Wind unanimously expected a comparable corporate average value of 21x), a target price of 16.8 yuan, and a purchase rating of 16.8 yuan.
Cost reduction measures have driven a month-on-month improvement in gross margin, and net interest rates have not recovered year-on-year in an environment of insufficient demand
The company's 2Q23 gross profit margin is 14.5% (YoY: -7.8pct, QoQ: 3.4 pct), net interest rate 2.7% (YoY: -15.8pct, QoQ: -3.8pct). The company promoted cost reduction through process improvements, etc., and gross margin increased month-on-month, but terminal consumption recovered weakly, and net interest rate still did not improve year-on-year. The fee rate for the Q2 period is 9.6% (YoY:
-1.9pct, QoQ: +4.3pct), a year-on-year improvement thanks to fee-control measures. The sales/management/R&D expense ratio was -0.7/-1.0/-0.7 pct year on year, and the financial expense ratio was +0.5 pct. The number of inventory turnover days declined for 4 consecutive quarters, and the number of 2Q inventory turnover days fell to 69.4 days. This confirms the supply-side effects of inventory removal, but overall cargo pulling momentum is still weak.
The high-end strategy creates barriers to competition, and focusing on NEV/5G communication/industrial control customers to introduce 1H23's high-end strategy has been very effective. 1) On the product side, high-end MLCCs with 12 specifications were delivered for production, 5 specifications were delivered in small batches, and the pressure resistance level of medium and high capacity MLCCs was raised by more than 2 levels; 2) On the material side, 4 key materials were output. For the first time in China, copper electrode paste for thick film resistors was completed and delivered in small batches, and a new high-reliability high-voltage ceramic material was completed for the first time in China. 3) On the manufacturing side, the yield of the Xianghe project has been greatly improved, and the multilayer inductor/integrated inductor technical improvement and production expansion project has begun construction. The company has stepped up market development efforts in fields such as new energy vehicles and industrial control, and introduced some industry leaders to carry out factory audits and certification. Some products have already been sold by leading manufacturers, and 1H sales for key customers such as 5G communications and industrial control have increased year-on-year. Optimistic about the company's high-end strategy will build competitive barriers and drive market share growth.
Give a target price of 16.8 yuan to maintain the buying rating
We are optimistic that the company will continue to increase its global share as a domestic MLCC leader with high-end strategies and the introduction of customers from diverse industries. EPS for 23/24/25 is predicted to be 0.31/0.56/0.74 yuan. Given the pace of recovery in downstream demand, the company's profit in 24 years is expected to recover significantly. Based on the long-term potential brought about by the company's high-end market development and the business vitality revitalized by management changes, it will be given 30x PE in 24, and a target price of 16.8 yuan (previous value of 21.1 yuan) will be given to maintain the purchase rating.
Risk warning: The risk that the macroeconomy drags down demand; the risk of progress in expanding production.