2023 and 1Q24 results were slightly lower than our expectations
The company announced 2023 and 1Q24 results: In 2023, it achieved revenue of 12.04 billion yuan, down 4.36% year on year, net profit of 2.53 billion yuan, down 36.84% year on year, of which 4Q23 achieved operating income of 2,949 billion yuan, down 10.9% year on year, down 16.3% month on month, net profit to mother of 373 million yuan, down 51.8% year on year and 50.2% month on month; 1Q24 achieved operating income of 2.33 billion yuan, down 21.1% year on month. Profit was 158 million yuan, down 75.6% year on year and 57.6% month on month. Due to product price cuts, the company's performance was lower than our expectations.
Development trends
Due to falling product prices, accrual impairment losses, bonus accrual, etc., 4Q23-1Q24's single flat profit continued to decline. We expect the company to ship about 1.25 billion square meters in 4Q23, with a total shipment of 4.95 billion square meters in 2023 (A product wet film caliber, which is different from the A/B products of dry and wet films disclosed in the company's annual report). We estimate that the profit for a single flat rate is about 0.3 yuan. If we add back 186 million yuan of impairment losses, the operating flat profit exceeds 0.4 yuan. The 1Q24 company shipped about 1.25 billion square meters. Affected by falling product prices, low capacity utilization, and year-end bonuses, etc., we estimate that the single flat profit fell to 0.12 yuan. If the bonus of about 100 million yuan is added back, the operating profit is 0.2 yuan.
Increased capacity utilization and price stabilization in 2Q24 are expected to drive up unit profit. The increase in the share of overseas customers and the increase in the share of coated film will drive profits throughout the year. On the price side, the 2Q24 industry chain continues to stabilize the price of diaphragms. The company's 1Q24 production capacity utilization rate is less than 70%, and has now increased to about 90% (our estimate data). Diaphragms are an asset-heavy industry, and the increase in capacity utilization is expected to drive a month-on-month improvement in unit profits. Looking at the whole year, we expect the company's customer share in LG, Panasonic, ACC, Northvolt, etc. to increase, and the share of overseas customers is expected to increase to 25%. In addition, the proportion of high-value coated film shipments is also expected to account for more than 50% in 24, boosting the company's profit level.
Expense rates increased during the period, and profitability declined. The company's sales/management/R&D/finance expense rates for 1Q24 were 0.8%/5.7%/6.6%/2.0%, respectively, with month-on-month changes of -0.1pp/2.9pp/1.2ppt, respectively. The cost rate increased mainly due to the month-on-month decline in operating income and bonus accrual. In terms of profitability, the company's 1Q24 gross sales margin fell 9.6ppt to 18.9% month-on-month, net sales margin fell 5.9ppt to 6.8% month-on-month, and profitability declined month-on-month.
Profit forecasting and valuation
Due to the price reduction of diaphragm products, we reduced our net profit for 2024 by 46% to $1.87 billion, while introducing a net profit forecast of $2.35 billion for 2025. The current stock price corresponds to 20.7 times the 2024 price-earnings ratio and 16.4 times the 2025 price-earnings ratio. Maintaining an outperforming industry rating, we simultaneously lowered our target price by 43.8% to 45 yuan, corresponding to 23.5 times the price-earnings ratio of 2024 and 18.7 times the price-earnings ratio of 2025. There is 13.9% upside compared to the current stock price.
risks
Demand for downstream lithium batteries fell short of expectations, and competition in the diaphragm industry intensified, and the price drop exceeded expectations.