2023 results fall short of our expectations
The company announced 2023 results: revenue/net profit to mother of 838.91/1.822 billion yuan, +12.5%/+1.4%, of which 2H23 revenue/net profit attributable to mother was 424.20/904 million yuan, -2.6% YoY/-12.8%, and +2.3%/-1.6% month-on-month; the performance fell short of our expectations, and we think it may be dragged down by the lithium battery and recycling business.
Development trends
Lead-acid batteries have been growing steadily for 23 years, and gross margin has declined slightly. The company achieved revenue of 42,423 billion yuan in 23 years, +18.7% year-on-year, with shipments of 445 million units, an increase of 15-20% over the previous year. We believe this is mainly due to the high popularity of the domestic two-wheel electric vehicle market and the increase in the company's market share. In terms of profitability, the company's 23-year gross profit margin for lead-acid batteries was 15.08%, -0.66ppt year on year. We think it may be due to the increase in raw material prices and the company's adoption of a price strategy to expand market share. Looking ahead to 2024, we believe that the domestic two-wheeler market is expected to maintain 5-10% growth at the industry level, and that the electrification rate in overseas Southeast Asia and other regions is also expected to increase its electrification rate driven by subsidies. At the company level, we believe that the company is expected to grow steadily with the industry and increase its market share slightly in 2024, and profitability is also expected to increase steadily as costs fall and increase efficiency.
Profits in the lithium battery and recycling business are under pressure, with 24 years of profit or marginal recovery. The company's lithium battery business revenue in '23 was 882 million yuan, down 45.0% year on year. We expect annual losses to increase year over year, mainly due to: 1) fluctuations in lithium prices affecting energy storage delivery, reduced company shipments and low capacity utilization; 2) high-priced lithium carbonate inventories, and the company's inventory reserve of 339 million yuan over 23 years. In terms of recycling business, the company's lead recycling business revenue was 3,069 billion yuan, the same as the previous year. We estimate that profitability was pressured by the price increase of waste lead batteries. The revenue of the lithium recycling business in '23 was 531 million yuan, a year-on-year decrease of 27.2%. We estimate that the price reduction of downstream lithium and cobalt metals also led to a decline in profitability. Looking ahead, we expect that shipments and profits in the company's lithium battery business may pick up in '24. The lead recycling business is still expected to be affected by the increase in the price of used batteries, but profits or marginal improvements. The profitability of the lithium recycling business is expected to recover after lithium carbonate and battery prices stabilize.
The lead-carbon project was successfully connected to the grid, and sodium electricity is progressing smoothly. In terms of lead-carbon batteries, the company achieved revenue of 338 million yuan, an increase of 100% over the previous year. We estimate that the shipment volume is around 1.3 GWh. The SDIC Huzhou lead-carbon energy storage plant in which the company participated was successfully connected to the grid in 2023. We believe that the demonstration project may promote the expansion of new orders for the company. In terms of sodium electricity, the company has completed applications in scenarios such as forklift batteries and heavy truck parking batteries, and has implemented a pilot production line for sodium electricity.
Profit forecasting and valuation
The profit of the company's lithium battery and recycling business remains under pressure in the short term. The profit forecast for 2024 was lowered by 29.8% to $2.559 billion, and the target price was lowered by 22.7% to HK$8.5 billion. Considering the basic digestion of high-priced lithium battery stocks and the main business is still expected to support profits in the medium to long term, we maintain our outperforming industry rating. The current stock price and target price correspond to 3.4x/2.8x P/E and 4.4x/3.7x P/E in 2024/2025, respectively, with 16.0% upside.
risks
Domestic sales of electric two-wheelers fell short of expectations, and the price increase of upstream raw materials exceeded expectations.