The 3Q23 performance was slightly lower than our expectations
The company announced results: 1-3Q23 revenue +47% yoy to 1.19 billion yuan, net profit of net income +44.7% yoy to 97.08 million yuan, net profit minus +34.0% to 84.41 million yuan. Among them, 3Q23 revenue was +52.7%/+14.5% month-on-month to 450 million yuan, net profit was -7.8%/-20.2% month-on-month to 25.13 million yuan, net profit minus -0.1%/-5.2% month-on-month to 25.31 million yuan. The 3Q23 performance was slightly lower than our expectations, mainly affected by the decline in production capacity in the new energy core business.
Development trends
In 3Q23, revenue continued to rise year on year, and the decline in production capacity put pressure on profitability. In 3Q23, the company's gross margin was -2.4pct/-0.6pct to 16.7% month-on-month, and net profit margin -3.6pct/-2.4pct to 5.6% month-on-month. Profitability declined. We believe the main reason is that the new energy core business has many downstream customers and product models, and is in the stage of rapid volume growth, and capacity utilization still needs to be improved. The 3Q23 sales/management/R&D/finance expense ratio was 1.1%/3.6%/4.4%/1.3%, year-on-year -0.1ppt/ +0.0ppt/ +0.7ppt/ -0.1ppt, +0.2ppt/ -0.0ppt/ +1.2ppt/ +0.4ppt. The company's sales and management expenses were relatively steady, technological innovation continued to be promoted, and R&D investment increased.
The main business is growing steadily, and natural gas injection systems are tied to Bosch orders and contributed to additional volume. The company obtained the qualification of a designated supplier from Bosch in 2017, and the production capacity of the natural gas jet rail assembly production line reached 90,000 units in 2021. Currently, it is directly supporting Bosch and indirectly supporting OEMs such as Weichai and Cummins. We believe that as the world's leading automotive engine assembly system provider, Bosch has a leading position in the natural gas power sector. The high prosperity of the natural gas truck industry and Bosch's high market share are expected to contribute to a new increase in the company's revenue performance. Furthermore, in terms of the new energy core business, the company's share of leading foreign-funded electric vehicle companies has increased, UMC continues to increase, and customers such as Fredi Power/Star Drive/Jinkang Power have achieved mass production; in the EGR business, there are a number of hybrid passenger car customers; and micro-research precision management is steady.
Equity incentives bind the interests of core employees, and performance assessment goals demonstrate confidence. In September 2023, the company released a draft equity incentive plan. The plan is to grant 110 people, including core executives, a total of 2.76 million restricted shares. We estimate that the performance assessment target is: 2023/2024/2025 revenue of +50%/+47%/+27% to 17/25.32 billion yuan, net profit of +90%/+58%/+33% to 1.4/23/3.0 billion yuan, and the corresponding net interest rate is 8.3%/9.0%/9.4%. We believe that the revenue performance target of this equity incentive assessment is positive, and the net interest rate growth guide is optimistic. We judge that the profit margin of the company's new energy business may be under pressure in the short term, and we are optimistic about improvements in long-term capacity utilization and profitability.
Profit forecasting and valuation
Due to pressure on the profit margin of the new energy core business, we lowered our 2023 profit forecast by 14.4% to 140 million yuan, keeping the 2024 profit forecast unchanged. The current stock price corresponds to 34.7/20.1 times 2023/2024 P/E. Considering valuation catalysts brought about by the natural gas heavy truck business, maintaining an outperforming industry rating and target price, the target price corresponds to 37.2/21.6 times the 2023/2024 P/E, with 7.9% room for growth.
risks
Production capacity in the new energy business fell short of expectations, production and sales of heavy natural gas trucks fell short of expectations, and competition in the industry intensified.