Profitability is predicted to increase by 128%-202% year-on-year

The company announced that net profit due to mother is estimated to be 46%-61 million yuan in 2023, up 128%-202% year on year; net profit without deducted return to mother is expected to be 33%-50 million yuan, up 88%-185% year on year. That is, 4Q23 net profit to mother was 0.5-205 million yuan, and net profit from 3Q23 was -71% to +3% month-on-month. The results were slightly lower than our expectations, mainly due to the energy storage market falling short of expectations.

Key points of interest

Raw materials for modified plastics remained low, and production and sales continued to grow. On the cost side, the price of polypropylene/ABS/polyethylene/polycarbonate, the raw material for modified plastics in 2023 was -14%/-19%/-6%/-18%, respectively, and the gross margin of the company's modified plastics business rebounded. According to data from the China Association of Automobile Manufacturers, in 2023, China's production of passenger cars/commercial vehicles/new energy vehicles was +10%/+27%/+36% year-on-year, respectively. Demand for modified plastics for vehicles increased, and the production and sales revenue of the company's main products increased significantly. The South China plant planned by the company in 2023 has been put into operation with 150,000 tons of modified new materials, and the Tianjin plant is under construction. The company is actively promoting modified materials for new energy vehicles and has achieved in-depth cooperation with many new energy vehicle companies. We expect the production and sales volume of the company's main business will continue to grow.

Continue to lay out the energy storage business and accelerate the promotion and application of the energy storage business. The company focuses on energy storage business and actively promotes product development, promotion and application. 2H23 has successively signed framework agreements with companies such as China Construction Fifth Bureau Installation, Tianchen Energy, Guangpu Co., Ltd., Weilan New Energy, and Shaanxi Xinhua to deeply bind customers and promote industrial applications. The company continues to expand its energy storage scale. According to the company's announcement, the 6Gwh production capacity of the Zhuhai plant is scheduled to be put into operation in 2Q24. Furthermore, we believe that the price of energy storage products has basically bottomed out, and the gross margin of the company's energy storage business may recover slightly in 2024.

The LCP business may enter a critical period of industrialization. The company has been working in the LCP film field for many years. According to the company's announcement, the company's LCP film products have successively received small-batch purchase orders from many customers. Downstream customers use the company's LCP film products in terminal products used in 5.5G, 6G, WiFi7, AI servers, AI-PC, etc., and are progressing smoothly. We believe that in the future, with the commercialization of the millimeter-wave band, LCP materials are expected to usher in a critical period of industrialization.

Profit forecasting and valuation

Due to the company's energy storage business profit falling short of expectations, we lowered 2023/24 net profit by 13.9%/36.7% to 503 million yuan/611 million yuan, and introduced net profit of 820 million yuan in 2025. The current stock price corresponds to 2024/25 17.1x/12.8x price-earnings ratio. Maintaining an outperforming industry rating, the target price was lowered by 24.4% to 11.8 yuan, corresponding to the 2024/25 price-earnings ratio of 21.5x/16.0x, with 25.5% upside compared to the current stock price.

risks

The recovery of the energy storage market fell short of expectations, and the price of modified plastic raw materials rose.