The volume and price of 2023Q3 automotive interior leather rose sharply and received a new target, maintaining the 2023Q3 “buy” rating, 2023Q3 revenue of 744 million yuan (+12.8%), net profit of 81 million yuan (+0.5%), 2023Q1-Q3 revenue of 1,941 million yuan (+38.6%), and net profit of 174 million yuan (+31.7%). We maintain our profit forecast. We expect net profit from 2023-2025 to be 22/29/350 million yuan, corresponding to EPS of 0.8/1.0/120 million yuan, and current stock price corresponding to PE of 16.3/12.5/10.4 times. We are optimistic about the improvement in domestic demand in the main industry, the rapid development of international customers, the rapid development of automotive interiors & the increase in the scale and profit of Baotai, and maintain the “buy” rating.
The decline in the main business is due to weak domestic demand, a double increase in the scale and profitability of Hongxing, and a month-on-month improvement in Profitability of Baotai (1) Leather for shoes and straps is affected by weak domestic demand in the short term: 2023Q3 revenue is expected to be 385 million yuan (-11%), mainly due to downstream customers reducing purchasing volume due to weak consumption. Sales volume is -17% year-on-year, and gross margin is expected to be 21%. (2) The volume and price of leather used in automotive interiors have risen sharply, and both scale and profit have increased: 2023Q3 revenue is expected to be 170 million yuan (+33%), of which ASP +20% or more, mainly due to Q3 entering the peak season and a significant increase in sales volume of designated models. Net profit of 34 million (+213%), gross profit margin of 34% (+12pct) /net profit rate of 20% (+11pct), profitability is better than expected. (3) Baotai's profitability improved month-on-month: 2023Q3 revenue is expected to be 137 million yuan, +6% month-on-month, net profit of 13.8 million, +260% month-on-month, and gross profit margin of 15.5%, +4.3pct month-on-month.
The profitability of 2023Q3 increased, and the net interest rate for leather used in automotive interiors exceeded the expected level for the whole year (1) Profitability: 2023Q3's gross profit margin was 23.7%, which was basically the same year on year, and the period expense ratio was 6.9% (-0.5pct). Among them, the sales/management/R&D/financial expenses ratio was +0.2/-0.2/+0.1/-0.5pct, respectively, and the net profit rate was 10.8% (-1.3 pct). (2) Operating side: The net operating cash flow of 2023Q1-Q3 was $06 billion ($48 million in Q1-Q3 in 2022). The decline was mainly due to an increase in employee remuneration paid. As of 2023Q3, the inventory size was 1,218 billion yuan (+36.7%), and the number of inventory turnover days for the first three quarters was 198 days (+4 days).
It is expected that the peak domestic season and export sales development will promote the recovery of the main business, rapid growth of automotive leather, and improvement in Baotai's profit (1) Leather for shoes, bags, and straps: Q4 will usher in a peak domestic consumption season, and downstream customers are in demand to make up orders. It is expected that Q4 performance will improve. At the same time, the development of overseas brands will increase in 2023, providing growth for 2024. The supply side expects Indonesian factories to be put into production in 2024H2 one after another. (2) Leather for automotive interiors: The ideal monthly delivery volume for Q4 is expected to exceed 40,000 units, and delivery of Star Era cars owned by Chery is expected to begin. It is expected that Q4 will continue the high growth momentum of Q3.
It is expected that the 2024 facelift and new fixed points will support rapid growth, NIO's facelift and leather options will change to standard, ask the world's M5 facelift and upgrade, and the newly targeted Ideal L6 and Chery will deliver Star Era SUV models. (3) Baotai: With the expansion of collagen and two-layer skin, it is expected that the scale and profitability will increase further in 2024.
Risk warning: The expansion of new customers and new categories, and the increase in profitability fell short of expectations.