1Q24 results were higher than our expectations
The company announced 1Q24 results: revenue of 23.486 billion yuan, +20.87% year-on-year; net profit to mother of 981 million yuan, +59.48% year-on-year. The company's performance exceeded our expectations, mainly due to continued high growth in cold washing exports, and the year-on-year improvement in profit margins in core businesses such as Baidian, CCAC, and Sandian exceeded our expectations.
The competitiveness of Baidian has improved, and profitability has continued to improve: 1) Since 2H22, with the decline in raw material costs, leading profit protection strategies, and the release of consumer demand for home appliances, second-tier white power brands have generally begun to recover, unleashing strong performance elasticity. Hisense is the leader among them. 2) In the domestic sales market, the company actively promotes the development of declining channels and product structure upgrades. The share of refrigerators and air conditioners continues to increase, and the growth rate is significantly higher than that of the industry. For example, 2023/1Q24 air conditioning retail sales share was +0.8pp/+1.1ppt year-on-year, and offline +0.4pp/+1.4ppt year-on-year. 3) Since 1Q24, although copper prices have continued to rise, the company has continued to release cost reduction and efficiency dividends, and has accumulated some low-price raw materials ahead of schedule, with a gross profit margin of 21.6%, +0.5ppt year over year, continuing to improve; raw material hoarding also led to 1Q23's net operating cash flow of 156 million yuan, lower than net profit, and 1Q24 inventory increased by 410 million yuan compared to the end of 2023.
Ice washing exports continue to increase, and profit margins are gradually recovering: 1) Currently, the increase in the penetration rate of household appliances in emerging markets and the replenishment of stocks in the European and American markets are simultaneously driving a high increase in China's home appliance exports. The export value of air washing (in US dollars) in 1Q24 was +2%/+28%/+21%, respectively, maintaining a high level of prosperity. 2) The growth rate of Hisense's own export brands is higher than that of OEM, with independent brands accounting for more than 70%, showing a strong alpha. We estimate that 1Q24's white power export sales growth is higher than the industry, and at the same time, ice washing exports can also turn losses into profits.
CCAC's performance was steady, and S&C made a small profit: 1) According to industry online data, in January-January 2024, China Air China's domestic sales volume was +14% year over year, and exports were +26% year over year. We estimate that Hisense Hitachi's domestic and foreign sales growth rate in 1Q24 followed industry trends and continued to grow steadily. 2) As costs have declined, 2H23 Hisense Hitachi's net profit margin has recovered to 15%, and we estimate that the 1Q24 profit margin will continue to improve. 3) The profit situation of Sandian continues to improve, and we estimate that 1Q24 can achieve a small profit.
Development trends
The company is gradually moving from a second-tier white power brand to the industry leader. The market share of the white power business continues to increase, and improvements in domestic and foreign sales profits are being realized quarterly. We believe that with the improvement of the governance structure, Hisense's competition in the fields of globalization and HVAC is expected to further increase, and future performance is expected to continue to grow steadily.
Profit forecasting and valuation
As profit improvements in the company's various businesses exceeded expectations, we raised our 2024/2025 profit forecast 7%/7% to 3,647 billion yuan/4.267 billion yuan. The current stock price corresponds to 13.3x/9.7x P/E for 2024 A/H shares. A/H shares maintained an outperforming industry rating and raised the target price of A/H shares by 9%/9% to HK$42.6/38.5, corresponding to 16.2x/13.0x P/E for A/H shares in 2024, with an upward margin of 22%/35%.
risks
Competition risk in the air conditioning market; risk of fluctuations in raw material prices; progress in global layout falls short of expectations.