FY23 and 1Q24 results are in line with our expectations

The company announced FY23 and 1Q24 results: FY23 revenue of 8.709 billion yuan, +28.9%; net profit to mother of 468 million yuan, +131.8% year on year; of which 4Q23 revenue was 2,212 billion yuan, -10.7% year on month, -9.7% month on month; net profit to mother 66 million yuan, +34.4% year on month, and -67.0% month on month.

1Q24 revenue was $1,947 million, +2.0% year over month, -12.0% month on month; net profit to mother was 78 million yuan, -24.3% year on year, +18.5% month on month. The results were in line with our expectations.

Development trends

Raw material prices remain low, and the company's modified plastic production capacity continues to expand. In terms of raw materials, the price of modified plastics raw materials declined in 2023, and the gross margin of the company's main business rebounded; among them, the price of raw materials fluctuated slightly in 4Q23, and the gross margin of the company's 1Q24 modified plastics business remained stable. In terms of demand, domestic automobile production and sales were +5.3%/+10.6% year-on-year in 1Q24; among them, production and sales of new energy vehicles were +29.2%/+31.8%, respectively. The company focuses on the NEV market and actively explores the share of NEV OEMs. It has now become a material supplier for many domestic NEV brands. According to the company's announcement, the company currently has a modified plastic production capacity of 430,000 tons, and the Tianjin plant under construction has a production capacity of 150,000 tons. The company plans to start production in mid-2025. We expect the company's modified plastics business to maintain high growth. Furthermore, the company is speeding up the expansion of overseas business and plans to select and build new overseas bases in Southeast Asia and Mexico.

New energy storage capacity is about to be put into operation, and the company is actively promoting downstream market applications. The profit of the energy storage industry was low in 2023. The net profit of the company Haishida was 56 million yuan (49 million yuan), down 17% year on year. We believe that the price of energy storage products has basically bottomed out, and the gross margin of 2H24's energy storage business may recover slightly.

According to the company announcement, the company currently has a small cylindrical production capacity of 2.83 Gwh, a square lithium iron phosphate battery production capacity of 1.19 Gwh, and a nano/lithium co-linear production capacity of 1.3 GWh. The company attaches importance to the layout of sodium-ion batteries. The 10 GWh energy storage capacity is under construction, all of which are compatible with the production of sodium/lithium ion batteries; among them, the Qidong base will be put into operation in 2Q24 and the Zhuhai base will be put into operation in 3Q24. At the same time, the company continues to accelerate the promotion of energy storage business applications and continues to deeply cover more industrial customers through products such as lithium iron phosphate and sodium-ion batteries.

The LCP business may enter a critical period of industrialization. The company has been working in the LCP 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 are testing products using the company's LCP film products for 5.5G, 6G, WiFi7, AI servers, AI-PC and other terminal products, which are progressing smoothly. We believe that in the future, with the commercialization of millimeter-wave bands, LCP materials are expected to usher in a critical period of industrialization.

Profit forecasting and valuation

Due to the continued decline in prices and profits of energy storage products, we lowered our 2024/25 net profit by 8.5%/5.7% to 559 million yuan/774 million yuan. The current stock price corresponds to 20.7 times/15.0 times the 2024/25 price-earnings ratio.

Maintain an outperforming industry rating. We believe that profits in the energy storage industry are currently low, but there is still good room for development in the medium to long term. Maintaining a target price of 11.8 yuan, corresponding to 23.5 times/17.0 times the 2024/25 price-earnings ratio, there is 13.5% upside compared to the current stock price.

risks

Prices of modified plastic raw materials have risen, the restoration of the energy storage market has fallen short of expectations, and the commissioning of new projects has fallen short of expectations.