Event: The company released its three-quarter report for 2023. In Q3 of 2023, the company achieved operating income of 13.506 billion yuan, +5.39% year-on-year; net profit of 619 million yuan, -7.94% year-on-year; net profit after deduction of 462 million yuan, -20.69% year-on-year. In 2023, Q1-3 achieved operating income of 35.064 billion yuan, +16.72% year-on-year; net profit of 1,712 billion yuan, +20.12% year-on-year; net profit after deduction of 1,370 billion yuan, +26.01% year-on-year.

Key points of investment:

The scale of revenue continued to expand, and Q3 profitability declined slightly. The company's main business includes lead-acid batteries and lithium batteries. Among them, lead-acid batteries have accounted for nearly 95% of the revenue since 2022, and the gross margin for the past three years has been around 20%, and the profitability is significantly higher than other existing businesses. 23Q3's revenue was +5.39% year-on-year, but overall gross margin and net profit margin were 16.21%/4.42%, respectively, with year-on-year changes of -1.91/-0.75pct, respectively, and profitability declined slightly year-on-year. In terms of cost composition, the sales/management/R&D/financial expense ratio of 23Q3 company was 2.16%/2.05%/3.72%/-0.16%, respectively, with year-on-year changes of -0.21/-0.80/+0.63/-0.24pct. Among them, R&D expenses accounted for a relatively large share and increased significantly year-on-year. We infer that this may be one of the reasons why the company's profitability declined slightly. Furthermore, considering that the company's new businesses such as lithium batteries and sodium batteries are developing at an accelerated pace, their profitability has yet to be improved, leading to a decline in the company's overall profitability.

Product iterations are superimposed on production line construction, and lead-carbon energy storage is developing at an accelerated pace. Since 2023, the demand for lead-carbon energy storage from downstream customers has gradually increased due to the low cost, good safety and high recycling rate of lead-carbon batteries, and the promotion of superimposed policies. In this context, the company actively grasps lead-carbon energy storage market opportunities. In terms of product performance, the company continues to upgrade its lead-carbon battery products and continuously increases the number of product cycles to meet the different needs of customers. In terms of production line construction, the Huzhou integrated smart zero-carbon power plant “peaceful co-storage” project jointly built by the company and China Power Investment Corporation was officially put into operation in March of this year. The installed capacity of the project is 100 MW/1000 MWh, about 3 million lead-carbon batteries, and the battery capacity required for the first phase of the project is equivalent to 415,000 electric two-wheelers. It is expected that after completion, the project will further accelerate the development of the company's lead-carbon energy storage business and create the company's second growth curve.

With multi-dimensional breakthroughs in technology, customers, and industrialization, the new battery business is progressing steadily. Based on the traditional lead-acid battery business, the company is steadily advancing new battery businesses such as lithium batteries, hydrogen fuel cells, and sodium-ion batteries. In terms of lithium batteries, the company is steadily promoting production capacity implementation and digital management of lithium battery projects, while also reserving high-quality customers related to energy storage; in terms of hydrogen fuel cells, the company's technical team continues to improve the research and development of core technologies and core components related to fuel cells, and its fuel cells have also achieved new breakthroughs in construction machinery application scenarios; in terms of sodium ion batteries, the company is actively promoting related technology reserves, industrialization and overseas market promotion.

Profit forecast: The company is a leading domestic lead-acid battery company, and has actively expanded in the fields of lead-carbon and new batteries in recent years, thus creating new profit growth points. We forecast that the net profit of the company from 2023-2025 will be 24.67, 29.77, and 3.428 billion yuan respectively, corresponding to PE of 14, 12, and 10 times. Considering that the company continues to increase investment in R&D, but most of the corresponding projects are currently in R&D or trial production, it will still take time to contribute additional revenue and performance to the company. Therefore, we slightly downgraded the company's valuation to 16 times PE for 2023 (18 times the previous value), corresponding to the target price of 40.61 yuan, and maintain the “buy” rating.

Risk warning: the risk that lead-acid batteries will be replaced; the risk that production capacity will not be released as expected; the risk of large fluctuations in the price of raw materials for lithium batteries; there may be a risk that the public information used in the research report may be out of date or not updated in a timely manner.