2023 results fall short of our expectations

The company released its 2023 performance report: it achieved operating income of 4.884 billion yuan, a year-on-year net profit loss of 236 million yuan, lower than market expectations. It was mainly affected by factors such as a significant drop in the gross margin of the main business photovoltaic film and inventory impairment losses at the end of the period.

Key points of interest

We believe that the main reason for the company's profit loss in 2023 was the decline in the profitability of the adhesive film business. In addition, the non-adhesive film business also had a negative impact on the company's profit. In the adhesive film business, fluctuations in raw material prices in 2023 combined with lower product prices and higher cost factors affected film profitability. 1) The price of adhesive film products decreased due to increased competition on the price side of the price side and the continuous decline in component prices; 2) the price of raw material particles on the cost side fluctuated, and the decline in the price of storage particles lagged behind the reduction in adhesive film prices, which in turn led to the phenomenon of high-priced particles being used at low prices. The company needed to calculate inventory impairment losses for high-priced particles; 3) On the cost side, due to the rapid expansion of the company's production capacity in the early stages, the scale effect has not been fully released. Higher costs due to lower capacity utilization . In the non-photovoltaic business, the company maintains a high level of investment in research and development in fields such as electronic functional films for new energy vehicles and new environmentally friendly surface materials, and also lays out marketing and marketing. New products have not yet reached break-even, dragging down performance.

We believe that the company's profit improvement in 2024 is more definitive, mainly for the following three reasons: 1) The demand for component cost reduction is urgent, or it may switch from using POE film to EVA film product packaging. For example, N-type batteries currently using LECO technology will be packaged in double-sided EVA film, and the company has extensive experience in manufacturing EVA film, the product quality is better, the component packaging requirements are better adapted to the company's product structure, and it is expected to return to its advantage zone; 2) The company has completed inventory impairment calculations and is expected to go into service lightly. The fluctuation is less than In 2023, the impact of cost fluctuations on film profitability weakened; 3) Demand for modules improved after the holiday season, and module production is expected to be +50% month-on-month. In addition, particle prices are expected to rise slightly. According to Baichuan Yingfu, the average price in the photovoltaic market is currently 12,166 yuan/ton, up 133 yuan/ton from before the Spring Festival, an increase of 1.1%. Driven by better downstream demand and rising particle prices, we believe that film prices are about to rise, and profits are expected to recover.

Profit forecasting and valuation

Considering the pressure on the company's adhesive film profits and calculating large inventory impairment losses at the end of the year, we lowered our 2023 profit to -236 million yuan. At the same time, considering that the company's 2024 profit improvement will take time, the 24-year profit forecast was adjusted from 812 million yuan to 132 million yuan, and 2025 profit of 156 million yuan was introduced for the first time. Maintaining an outperforming industry rating, the target price was lowered by 62% to 55.31 yuan, corresponding to 35/30xP/E in 2024/2025, which is 13% higher than the current stock price, and the current stock price corresponds to 31/26xp/E in 2024/2025 due to the downturn in the valuation center of the PV sector compounded by 23 performance losses.

risks

Prices of raw materials fluctuated, and downstream demand fell short of expectations.