The company released its 2023 three-quarter report. The company achieved net profit of -79 million yuan in 2023Q3 in a single quarter, -132% year-on-year, -140% month-on-month, net profit minus 111 million yuan, -146% year-on-year and -162% month-on-month.

The company's 23Q3 performance declined month-on-month. We expect mainly changes in current processing fees and customer settlement adjustments to adversely affect the profitability of the company's lithium iron products. The company is a leading manufacturer of precision components for traditional automobile engines. It is actively transforming into a new energy circuit. The lithium iron phosphate business differentiates its position in the middle and high-end electric passenger car market. It uses the subrailway oxalate line, and the product compaction density is high. At the same time, the company lays out upstream resources in various ways, especially lithium and phosphorus sources, and the future cost reduction trend is clear. In addition, the company is actively building a matrix of intelligent electronic control products. Incremental components for new energy vehicles have already entered the supply chains of car companies such as Huawei, United Electronics, BYD, and New Power, with remarkable future growth. Considering that the company's profit in 2023 was greatly affected by impairment due to fluctuations in raw material prices, we expect 2024 to return to a steady growth trajectory. Using the segmented valuation method and referring to comparable company valuations, the company was given a target market value of 15.4 billion yuan for 2024, corresponding to the target price of 13 yuan, maintaining a “buy” rating.

Matters: The company recently released its 2023 three-quarter report. Our comments on this are as follows:

The 23Q3 performance was under pressure, mainly due to losses in the lithium iron phosphate business. The company achieved revenue of 4.178 billion yuan in the first three quarters of 2023, -11.54% year-on-year, net profit of 402 million yuan, -167% year-on-year, net profit of -462 million yuan, minus net profit of 462 million yuan, -190% year-on-year. On a quarterly basis, the company achieved revenue of 1,856 billion yuan in 2023Q3 in a single quarter, -8.37%, +16.20% month-on-month, net profit of -79 million yuan, -132% year-on-year, -140% month-on-month, net profit after deduction of 111 million yuan, -146% year-on-year, and -162% month-on-month. The company's 23Q3 performance declined month-on-month. We expect that this is mainly due to losses in the lithium iron phosphate business sector. Changes in current processing fees and customer settlement adjustments will adversely affect the profitability of the company's lithium iron products.

Gross margin was under pressure in 23Q3, and the cost ratio was relatively stable over the period. The company's comprehensive gross margin for the first three quarters of 2023 was about 10.99%, year-on-year -9.17pcts; on a quarterly basis, the comprehensive gross margin for the Q3 quarter of 2023 was about 1.47%, year-on-year -17.88pcts, and -16.20pcts. The company's 23Q3 gross margin declined month-on-month. We expect it to be mainly due to changes in processing fees and customer settlement adjustments for iron-lithium products; the cost rate for the period was 7.78%, +1.58pcts year-on-year, -0.62pct, of which: sales/management/development/finance expenses, respectively 0.88%/2.68%/3.33%/0.89%, year-on-year -0.30/ -0.09/+1.39/ +0.57pcts, -0.34/-0.77/ -0.49/+0.01pct month-on-month, the period fee rate remained relatively stable month-on-month.

Lithium iron phosphate: Continued promotion of cost reduction and efficiency, and the development of new products is progressing smoothly. In the lithium iron business sector, on the one hand, the company is increasing the development of new customers, while at the same time speeding up efforts to reduce costs and increase efficiency. 1) On the raw materials side, the company actively lays out and establishes a diversified lithium carbonate insurance and supply system, increases the proportion of lithium carbonate customers, and at the same time explores risk hedging tools such as futures hedging to improve the safety and stability of the supply chain. In terms of new lithium salts, the company's integrated lithium dihydrogen phosphate layout project was previously delayed due to preliminary preparations such as land supply by local governments, etc., and is currently actively advancing related work processes. 2) In terms of new products, according to the company announcement, the company is in the first tier of innovative research and development of new products such as lithium manganese-ferrophosphate. Relevant agreements have been signed with customers, and cooperation in R&D and other areas is close and smooth. According to the company's announcement, judging from the current business and production schedule, lithium iron phosphate production and sales are continuing to recover, processing costs are stabilizing, and overall market demand is gradually recovering. In the future, the company will make every effort to improve lithium iron phosphate business performance.

Auto parts: The market share and profitability of new energy incremental parts have been steadily increasing. The company has been deeply involved in the field of automobile engine components for a long time, and is also speeding up the deployment of intelligent electronic control and incremental components for new energy vehicles, including thermal management systems, new energy vehicle speed reducers, intelligent shock absorption systems, etc. The product line for incremental components for new energy and hybrid vehicles has gradually entered the harvest period and has begun to contribute to performance, and market share has steadily increased.

According to the company announcement, the operating income and net profit of 2023Q3's auto parts business increased steadily compared to the same period last year; there are currently sufficient orders for new energy auto parts, and the level of capacity utilization is high. We expect that new energy incremental components will become an important sector supporting the company's performance in the future.

Risk factors: New energy vehicle sales fall short of expectations; competition in the lithium iron phosphate cathode materials industry intensifies; upstream raw material prices fluctuate greatly beyond expectations; new technology customer verification falls short of expectations; competitive pressure on the company's traditional auto parts business is increasing.

Investment suggestions: The company is a leading manufacturer of precision components for traditional automobile engines. It is actively transforming into a new energy circuit. The lithium iron phosphate business differentially positions the high-end electric passenger car market, uses the subrailway oxalate line, and the product compaction density is high. At the same time, the company lays out upstream resources in various directions, especially lithium and phosphorus sources, and the future cost reduction trend is clear. In addition, the company is actively building a matrix of intelligent electronic control products. Incremental components for new energy vehicles have already entered the supply chains of car companies such as Huawei, United Electronics, BYD, and New Power, with remarkable future growth.

Considering factors such as the company's lithium iron phosphate business since 2023 due to fluctuations in lithium carbonate prices and the calculation of large asset impairment, we adjusted the company's 2023-2024 net profit forecast to -321 million/721 million yuan (previous forecast value was 15.98/2.135 billion yuan), while adding the net profit forecast for 2025 to 1,057 billion yuan, corresponding to 2023-2025 EPS of -0.26/0.59/0.86, respectively. The current price corresponding to 2024-2025 PE is 19 /13x. Considering that the company's profit in 2023 was greatly affected by impairment due to fluctuations in raw material prices, it is expected that 2024 will return to a steady growth trajectory, so the valuation is based on 2024 profit. Using the segmented valuation method, we expect the net profit of the company's auto parts business and lithium iron phosphate business in 2024 to be 550 million/170 million yuan respectively. The auto parts refer to the comparable companies Sanhua Intelligent Control and Baolong Technology (2024 Wind unanimously predicted average PE24x), and the lithium iron phosphate business refers to Germany's Nano and Wanrun Xinneng (2024 Wind unanimously predicted average PE13x), respectively, giving the company a target market value of 15.4 billion yuan for 2024, corresponding to the target price of 13 yuan , maintaining a “buy” rating.