1H23 performance fell short of our expectations
The company announced 1H23 results: 1H2023 revenue of 32.30 billion yuan, +33.0% year-on-year; gross profit of 302 million yuan, -10.9% year-on-year. The company's performance fell short of our expectations. The main reasons are: 1) the decline in gross profit margin in the TV business due to changes in the color TV market pattern compounded by rising panel prices; 2) As module prices fall, the upward elasticity of the profit margin of the photovoltaic business falls short of our expectations.
Development trends
Revenue growth was strong, and profits fell short of expectations. 1H2023's revenue was +33.0% year-on-year, and its performance was strong, mainly driven by revenue growth in the photovoltaic business. The overall gross margin was 13.0% (-3.0 ppt). The main reasons are: 1) competition in the color TV market combined with rising panel prices; 2) the share of the photovoltaic business, which has a lower gross margin, has increased markedly. Sales/management/R&D expenses were -1.0/-0.2/-1.0ppt year-on-year, respectively, and cost control was good. Other gains and losses (mainly financial asset investments) were $91 million ($118 million for 1H22). Overall, the company's 1H23 net interest rate was 0.93% (year-on-year -0.47ppt).
Looking at 1H23 by business: 1) Smart home appliance revenue (TV and white goods business) was 14.145 billion yuan (+9.1% year on year), with domestic TV/overseas TV/white TV business revenue of +1.6%/-2.2%/+89.0%, respectively, reaching 4.535 billion yuan/3,831 billion yuan/3.434 billion yuan, and gross margin of -4.7/+0.8/-0.7ppt year on year, respectively. The gross margin of the domestic television business has declined markedly due to rising panel prices and changes in the competitive landscape. The white power business has fully benefited from this year's boom in domestic air conditioning sales and the resilience of the white power export business. 2) The subsidiary Chuangwei Digital had revenue of 5.170 billion yuan (-17.1% YoY), net profit of 318 million yuan (YoY - 35.4%), overseas demand for set-top boxes declined, and the mobile phone module business lost money. 3) PV business revenue was 12.122 billion yuan (+188.3% year on year), accounting for 38% of revenue, and 130,000 new grid-connected household photovoltaic power plants were operated, totaling 339,000. The gross margin of the PV business was 7.4% (+0.2ppt compared to the previous year). Upstream module prices have dropped sharply since this year, and the company's profit margin has not increased significantly, falling short of our previous expectations. We estimate that the company will mainly benefit terminal power plant buyers and channel providers. 4) The modern service industry and other businesses (mainly including home appliance maintenance, logistics, property sales and leasing) had revenue of $925 million (+1.5% year on year), and segment profit margin of 19.9% (year-on-year -16.8ppt). We estimate that they were mainly affected by the slump in real estate sales and leasing.
Profit forecasting and valuation
As the company's profit fell short of expectations, we lowered our 2023/2024 net profit by 54%/60% to 758 million yuan/840 million yuan. The current stock price corresponds to the price-earnings ratio of 9.2 times/8.0 times 2023/2024. We are still optimistic about the company's long-term development in the black power, digital terminal, and photovoltaic business. Based on the 2023 SOTP valuation, we lowered our target price by 18% to HK$4.60, corresponding to the price-earnings ratio of 12.8 times/11.1 times in 2023/2024, which is 39% upward from the current stock price.
risks
Industry competition has increased risks; the company's PV business expansion has fallen short of expectations; panel prices have risen.