3Q23 performance is in line with our expectations

Furong Technology announced 3Q23 results: operating income was 553 million yuan, up 7% year on year, net profit was 84 million yuan, down 3% year on year. The year-on-year decline narrowed sharply, in line with our expectations. We believe that the main reasons for the slight decline in Furong's 3Q23 performance are: 1) 3Q23 Furong commenced operation of the first phase of the Fujian Luoyuan project, and the management expense ratio increased slightly; 2) exchange profit and loss and hedging were slightly hampered.

At the same time, Furong Technology issued the “Notice on Trusted Management of the Controlling Shareholder's New Energy and Automobile-Related Business and Equity” (later the “Notice”). The announcement revealed that the controlling shareholders will: 1) the new energy and automobile-related business of the Nanping Aluminum Special Materials Division; 2) Fujian Minlu Lightweight Vehicle Manufacturing Co., Ltd., and Furong Technology has entrusted the operation and management of these businesses and companies. We believe that after entrustment management, Furong is expected to improve the company's single product application field, help enrich the product structure and application fields, develop a second growth curve, or lead Furong in a new round of high-quality development and open up room for future growth.

Development trends

New products for consumer electronics terminal customers are being released one after another, which is expected to drive an increase in shipment volume. Recently, Apple released new products such as the M3 series chip and MacBook Pro and iMac, which built the M3 chip. We are optimistic that the release of Apple's new products is expected to drive an increase in shipments of related products. Furthermore, we expect mobile phone brands such as Samsung, OPPO, and vivo to release new products in the next 2-3 months, which may further drive the increase in mobile phone shipments. We believe that Furong, as an aluminum supplier for consumer electronics terminals such as mobile phones and PCs, is expected to benefit from increased terminal shipments and drive steady growth in related business revenue and profits.

The new energy business has a comprehensive layout, which is expected to open up more room for growth in the future. According to the above announcement, we believe that the layout in Furong New Energy battery trays and other fields is expected to enrich product structure and application areas and improve profitability. According to the semi-annual report, the first phase of Furong's production capacity in Luoyuan, Fujian, has been basically completed. We expect production capacity to be put into operation one after another this year. Considering the high demand for new energy battery trays, we are optimistic that Furong's new production capacity utilization rate may increase quite a bit. At the same time, according to the company announcement, Furong also has two and three production capacity plans. We believe that with the development of the new energy business and customer introduction and implementation, Furong Phase II production capacity construction will also be invested in the future. We believe that Furong's original business was mainly the supply of aluminum alloy materials. Further downstream deep processing development in the field of new energy is expected to increase the company's tonnage output value and promote the continuous growth of related business revenue and profits. Furthermore, according to the semi-annual report, Furong has planned and built a renewable aluminum project in Luoyuan, Fujian. We are optimistic about Furong's future ability to lay out the entire “raw materials - materials - deep processing” industry chain in the field of new energy, which is expected to strengthen the company's cost control capabilities and help develop new customers in the future.

Profit forecasting and valuation

We maintain 2023/24e EPS at 0.49/0.66 yuan, corresponding to 2023/24e 27.7/20.6x P/E. We maintain our outperforming industry ratings, consider Furong's new energy battery tray business layout, and improve the valuation center. We raised our target price by 13% to 17.0 yuan, corresponding to 2023/24e 34.7/25.7x P/E, which is still 24% higher than today.

risks

Shipments of downstream consumer electronics terminals fell short of expectations; progress in new energy business development fell short of expectations.