3Q23 results are in line with our expectations

The company announced 3Q23 results: revenue of 6.197 billion yuan, +6.22% year over month, +11.19% month on month; net profit to mother of 327 million yuan, -27.44% year on year, +4.58% month on month. 1-3Q23 revenue was 16.407 billion yuan, +17.34% YoY; net profit to mother was 839 million yuan, +2.89% YoY. It met our expectations.

Development trends

Revenue hit a quarterly high in recent years, and the expansion of the new energy business created a new growth curve. The company's 3Q23 revenue was 6.197 billion yuan, +6.22% year-on-year, and +11.19% month-on-month, a record high in a single quarter; revenue for the first three quarters was 16.407 billion yuan, +17.34% year-on-year. The company achieved steady growth mainly due to: 1) According to the company's 2022 annual report, Volkswagen customers account for more than 30% of the company's revenue. According to the Federation of Transport Federation data, Volkswagen 3Q23 achieved sales of 801,000 units, an increase of 5.1% month-on-month, and a strong revenue base; 2) The company made efforts to expand NEV companies such as Tesla, Cyrus, and BYD, and the share of new energy pure electric models in new orders continued to increase. We believe that in the context of the boom in new energy vehicles, the optimization of the company's order structure is expected to further increase the revenue of NEV companies and increase the certainty of medium- to long-term growth.

The scale effect was compounded by falling raw material prices, and profitability was stable, moderate and improving. The company's 3Q23 gross profit margin was 17.80%, year-on-year -2.30ppt, month-on-month +1.71ppt; net profit to mother of 327 million yuan; year-on-year -27.44%, +4.58% month-on-month. The year-on-year decline was mainly affected by the high base for the same period last year. On a month-on-month basis, the profit side achieved steady growth, mainly due to: 1) rising production capacity utilization rates and the release of scale effects; 2) prices of large raw materials such as plastic particles and rebar continued to fall; 3) the R&D side showed a certain scale effect. The 3Q23 R&D cost rate was 3.14%, -0.01pp/ -0.43ppt compared to the same period last month. We believe that in the future, as the company's product matrix continues to expand and upgrade, overseas business losses narrow, the company's profitability will continue to rise.

Promote the spin-off and listing of subsidiaries and deepen the lightweight layout of metal parts. The company issued a plan announcement on August 18. It plans to split its subsidiary Huaxiang Metal Technology Co., Ltd. and list it on the main board of the Shenzhen Stock Exchange to promote the application of new materials and new processes and achieve the goal of making Huaxiang Technology products lightweight. We believe that at present, the company is further expanding from cockpit products such as interior and exterior parts to chassis modules such as metal parts. If the subsidiary is successfully spun off and listed, it will help expand financing channels, enhance core technical capabilities, complement Huaxiang Technology's advantages in customer resources, brand, production base layout, etc., and continue to make efforts to make cars lighter, which is expected to create a second growth curve.

Profit forecasting and valuation

The earnings forecast for 2023 and 2024 remains unchanged. The current stock price corresponds to the 2023/2024 price-earnings ratio of 9.2 times/7.8 times. Maintaining an industry rating and a target price of 17.50 yuan, corresponding to 12.0 times the 2023 price-earnings ratio and 10.1 times the 2024 price-earnings ratio, there is 29.9% upside compared to the current stock price.

risks

Business expansion fell short of expectations, and overseas reversal of losses fell short of expectations.