3Q23 performance was slightly lower than our expectations

The company announced the results for the first three quarters: the company's revenue for the first three quarters was 42,620 billion yuan, +21.70% year-on-year, net profit of 2,991 billion yuan, -6.33% year-on-year, and net profit of 2,982 billion yuan after deducting non-return net profit of 2,982 billion yuan, +10.53% year-on-year. 3Q23's revenue was 14.769 billion yuan, +29.53% year-on-year, +21.98% month-on-month, net profit of 1,088 billion yuan, -28.40%, +54.89% month-on-month, net profit after deduction of 1,139 billion yuan, +6.64% year-on-year, +50.56% month-on-month, slightly lower than our expectations, mainly due to the slight pressure on low pressure 3Q revenue growth and the divestment of component business in the same period last year, contributing 382 million yuan in net profit, and continued to grow.

By sector, in the first three quarters: 1) Low voltage electrical appliance business revenue was 17.394 billion yuan, +3.28% year-on-year, net profit of 1.47 billion yuan, +8.26% year-on-year; 2) new energy business revenue was 25.623 billion yuan, +36.33% year-on-year, net profit after deducting the influence of central control was 1,627 billion yuan, -13.84% year-on-year. 3) Energy storage inverter business revenue was 1.42 billion yuan, +96.4% year-on-year.

Development trends

Low-voltage electrical appliances were repaired in the first three quarters. On the revenue side, overall revenue for the first three quarters was +3.28% year-on-year, and the revenue of Zhengtai China/Zhengtai International was +1.27%/+18.04% yoy, respectively. Looking at the 3Q alone, Zhengtai China's revenue was 3.66 billion yuan, +0.8% year on year; international business revenue was 1.102 billion yuan, -0.04% year on year; and the remaining subsidiaries had revenue of 1.156 billion yuan, +2.5% year on year. Profit side: The company's low-pressure gross margin in the first three quarters was about 28%, +3ppt over the same period last year. We estimate that the net profit margin for low-voltage appliances in 3Q23 was 8.0%, +1.5ppt year on year, -0.9ppt on month. Profitability recovered year on year, and decreased slightly month-on-month. We believe it mainly comes from business structure optimization, large-scale cost reduction, and pricing strategy optimization.

The restoration of the 3Q share of household photovoltaics is expected to achieve the annual 12GW+ development target. The company added 8.56 GW of household installed capacity in the first three quarters, +76.1% year-on-year, and 3.16 GW in 3Q23, +47% year-on-year and -1.3% month-on-month. We estimate that the company's share for the third quarter increased by 2.5ppt to 28% compared to the first half of the year. We expect to add 40 to 45 GW of domestic household PV installed capacity in 23, and the company is expected to achieve the annual development target of 12 GW or more. We expect domestic household PV demand to grow 25-30% in 24, and the company's new installed capacity will increase by more than 30% in 24.

Profit forecasting and valuation

We lowered the growth rate forecast and non-recurring income of low-voltage electrical appliances, and lowered the 2023/2024 net profit by 9%/11.8% to 42.4/4.83 billion yuan. Maintaining an outperforming industry rating, the target price was lowered by 10% to 33.2 yuan, corresponding to 16.8/14.8 times P/E in 2023/2024. There is room for 43% increase compared to the current stock price. The current stock price corresponds to 11.8/10.3 times P/E in 2023/2024.

risks

Macroeconomic growth fell short of expectations, demand for household photovoltaics fell short of expectations, and market competition worsened.