2Q23 results slightly exceeded our and market expectations

The company announced 1H23 results: achieved revenue of 1,065 million yuan, +107% yoy, net profit of 348 million yuan, +73% year on year; of these, 2Q23 achieved revenue of 485 million yuan, +70%, -16% month-on-month, net profit of 172 million yuan, +50%, and -2% month-on-month. Although 2Q23 slightly inverted shipments were -41% month-on-month, benefiting from the volume of energy storage system revenue and exchange revenue, the revenue and profit side were better than we and the market expected.

In terms of profitability, the company's 2Q23 overall gross profit margin was 38.4%, down 8.0 ppt, and 5.9 ppt. Mainly because 2Q23 achieved energy storage system revenue of 86 million yuan, while the gross margin of the energy storage system business was relatively low, the gross margin of the micro inverter business remained stable. In terms of the cost rate for the period, 2Q23, the company's cost rate for the period was 19.1%, +4.1ppt, and +8.8ppt from the previous year. Among them, the R&D cost rate was +4.0ppt and +4.4ppt year-on-year, mainly due to the company's continuous increase in energy storage business layout and increased R&D investment.

Development trends

Inventory is high in the European and Latin American markets. Focus on inventory removal in the second half of the year. The company's 1H23 micro-reverse shipments were 891,800 units, an increase of 131% over the previous year. Of these, 2Q23 micro-reverse shipments were about 331,800 units, -41% month-on-month, mainly because 1Q23 did not fade in the off-season, and the 2Q23 inventory removal pressure exceeded expectations, and the shipment volume was slightly under pressure. At the same time, the North American and Latin American markets had few PV installations due to interest rate hikes, etc., but in the past six months, microreverse shipments remained high. Looking ahead to the second half of the year and next year, we suggest paying attention to the inventory removal status of channel vendors and the company's order volume. At the same time, we are relatively optimistic that the micro-inverse DIY market is expected to continue to penetrate further from Germany to various European markets, and that the micro-inverter market will continue to replace group string inverters with high safety, high power generation gain, and high flexibility.

The energy storage business continues to expand and is expected to establish a second growth pole. The company's energy storage business continues to expand. The products cover AC coupled energy storage inverters, hybird inverters, small, medium and high power energy storage systems suitable for micro inverse systems, etc., and the company continues to increase R&D investment and continuously improve the pace of shipment of energy storage series products. We are optimistic about the energy storage system business as the main driving force for the company's growth in the second half of the year and in the future.

Hangkai Electric's business was divested to focus more on the main power electronics business. The company announced on August 30 that it will transfer 100% of the shares of Hangkai Technology, a wholly-owned subsidiary, to Hangkai Group. After the share transfer is completed, Hangkai Technology and its wholly-owned subsidiary will no longer be included in the scope of the company's consolidated statement. Since Hangkai Technology's main business is the manufacture and sale of electrical equipment, and is affected by increased competition in the industry and declining downstream demand, performance continues to decline. 1H23 achieved net profit of 69,300 yuan. Net interest rate is only 0.08%. We believe this equity transfer is expected to help the company focus more on the development of the new energy business and continuously optimize the quality of the report.

Profit forecasting and valuation

Due to heavy inventory removal pressure in the European market and weak demand in the North American and Latin American markets, we lowered our net profit of 2023/2024 by 35%/36% to 763/1,139 million yuan. The current stock price corresponds to 2023/2024 by 29/19 times P/E, maintaining outperforming industry ratings. Considering the downward shift in the valuation center of the industry, the target price is 48% to 321 yuan, corresponding to 35 times P/E in 2023. There is 22% upside compared to the current stock price.

risks

Overseas PV installation demand fell short of expectations, industry competition intensified, and there was a risk of trade friction.