Our opinion: Tianneng Power is a leader in lead-acid batteries, with a network of more than 400,000 terminal stores across the country, and the basic performance market is stable; energy storage uses a lead-lithium dual technology route, which is expected to release volume. The advantages of lead-carbon energy storage are obvious, which will drive performance growth in the future; in addition, the company's layout of lead-lithium recycling, hydrogen fuel cells, and sodium-ion batteries has improved long-term space. We expect the company's net profit to be 21.93, 27.73 and 3.385 billion yuan, respectively, +22.1%, +26.5%, and +22.0%, respectively; the company was given a target price of HK$10.50, corresponding to 2023-2025 PE, 4.0x, 3.3x, and the corresponding PB of 0.7x, 0.6x, 0.5x; the target price has room for 31.2% increase from the current price; the initial rating coverage gives the company a “increase in holdings” rating, and investors are advised to pay attention.

2023H1 Revenue and profit growth: 1) Revenue: 2023H1 +33.7% year on year to RMB 41,471 billion (RMB, same below); of these, manufacturing business and trading business revenue were 216.41 billion yuan and 19.830 billion yuan, respectively, +24.3% and +45.6%, respectively, accounting for 52.2% and 47.8% of revenue; within the manufacturing business, lead-acid batteries, lithium-ion batteries, and recycling businesses each accounted for 89.2%, 1.7%, and 8.0%; within the manufacturing business, lead acid batteries were the company's profit core. 2) Gross profit: 2023H1 gross profit margin +27.5% year on year to 3,034 billion yuan, gross margin -0.4 pcts to 7.3% year on year; overall gross margin declined slightly due to a short-term increase in the share of recycling business revenue with low gross margin; during the same period, the company's manufacturing business gross margin was +0.6 pcts to 14.1% year on year, mainly due to the increase in gross margin of lead-acid power batteries, and offset the negative impact of the decline in the gross margin of lead-lithium recycling business (due to rising raw material costs for used lead batteries and falling lithium carbonate market prices).

3) Net profit to parent: 2023H1 +20.9% year-on-year to 918 million yuan, in line with expectations.

The lead-acid advantage continues, creating a stable profit core: the company's lead-acid batteries are mainly lead-acid power batteries for two and three wheelers, as well as lead-carbon energy storage batteries, start/stop batteries, etc., with an annual production capacity of over 120 GWh. 2023H1, the company's lead-acid battery revenue was +35.8% year-on-year to 19.306 billion yuan; of these, lead-acid power batteries were the leader, with revenue +35.7% year-on-year to 18.867 billion yuan; lead-carbon energy storage battery discharge, revenue +208.5% year-on-year to 226 million yuan. The company's 2021 Q4 began to adjust the pricing strategy for lead-acid batteries, not only based on lead prices, but also included auxiliary materials such as sulfuric acid and plastic cases in the pricing mechanism to smoothly transmit the impact of fluctuations in raw material prices; at the same time, it promoted production automation, digitalization and intelligence, and strengthened cost control; the gross margin of 2023H1 lead-acid power batteries was +1.3 pcts to 15.94% year-on-year. In terms of lead-carbon energy storage, it has the advantages of low cost and high safety; in December 2022, Tianneng and Taihu Energy Valley signed a 30GWh lead-carbon battery procurement agreement; in March 2023, the first phase of the world's largest lead-carbon smart power plant, “peaceful co-storage”, jointly built with China Power Investment, was connected to the network, with an installed capacity of 100 MW/1.06 GWh.

The recycling business has outstanding channel advantages: 2023H1. The company's recycling business's foreign sales revenue was -10.2% year-on-year to 1,723 million yuan, of which the recycling revenue for lead-acid batteries and lithium-ion batteries was 1,414 million yuan and 309 million yuan, respectively. The rise in the cost of raw materials for 2023H1 used lead-acid batteries and the decline in the market price of lithium carbonate have put short-term pressure on the company's recycling business. The company has double whitelist qualifications for recycling and hierarchical utilization; has established a mature and complete lead recycling system, with more than 600 recycling outlets in 15 provinces across the country; and is actively deploying lithium battery recycling channels to promote strategic cooperation among NEV operators. By the end of 2023H1, the company's annual recycling capacity for lead-acid batteries and lithium-ion batteries was 1 million and 10,000 tons, respectively. The lead, molded case, and sulfuric acid recovery rates could reach more than 99%, and the lithium recovery rate was over 88%; the Jiangsu Binhai base was under construction, and the total lithium battery disposal capacity rose to 110,000 tons/year after completion.

Layout of lithium batteries, hydrogen fuel cells, and sodium electricity: 1) In terms of lithium batteries, the company currently has a production capacity of 7 GWh, 180 Ah and 280 Ah energy storage batteries, and various energy storage modules such as air cooling and liquid cooling, and has released TN200 liquid-cooled energy storage cabinets. The company's lithium battery technology has been upgraded at an accelerated pace. The new generation of lithium-manganese batteries has the dual advantages of lithium iron safety and ternary energy. The self-developed 511 Wh/kg solid-state battery has been certified by the National Testing Center. Due to fluctuations in the price of lithium salt, downstream customers are on the sidelines, and 2023H1 has shipped few lithium battery energy storage products. 2) In terms of hydrogen fuel cells, the company has made progress in electric stacks, membrane electrodes, bipolar plates, engine systems, etc.; the Shuyang base with an annual output of 3,000 fuel cell systems and components was completed by the end of 2022. 3) In terms of sodium-ion batteries, the company built a 300MW sodium-electric pilot production line in 2022, and the number of cell cycles exceeded 2,000 times.

Risk warning: Raw material costs and product prices fluctuate, the company's capacity expansion fell short of expectations, and the industry had excess capacity.