2023 results fall short of our expectations

The company announced its 2023 and 1Q24 results: in 2023, it achieved revenue of 801 million yuan, an increase of 8.5% year on year; net profit to mother was 243 million yuan; of these, 4Q23 achieved revenue of 507 million yuan, an increase of 46.0% year on year and 262.8% month on month. The company achieved revenue of 13 million yuan in 1Q24, a year-on-year decrease of 72.8% and a month-on-month decrease of 97.4%. Due to weak industry demand at the beginning of the year, the performance was lower than our expectations.

Development trends

Sales increased slightly year over year, and competition intensified the decline in sales prices. In 2023, the company sold 1,900 units of fuel cell systems, up 23.6% year on year, with sales power of 189.4 MW, up 17.27% year on year. According to data from Jiaotong Insurance Insurance, the installed capacity of Yihuatong fuel cells in '23 was 107 MW, with a market share of about 15%, down from '22. We think it was mainly due to the time difference between the company's shipments and terminal installations. Judging from the price, the average price of the company's fuel cell system was about 3,782 yuan/kw in '23. Due to intense competition in the industry, the price dropped 11% year on year.

Policy support is expected to drive sales of fuel cell vehicles, which are expected to reach nearly 10,000 units throughout the year. On February 29, Shandong exempted hydrogen vehicles from highway tolls, and on April 16, Chengdu also plans to waive high-speed tolls for fuel cell vehicles. We believe that for hydrogen energy heavy trucks, high-speed costs account for more than 20% of their total cost of ownership (TCO), and this policy will directly reduce the TCO cost of fuel cell vehicles by more than 2 million yuan. We estimate that under such circumstances, the total cost of ownership of fuel cell vehicles can be comparable to those of lithium batteries and diesel vehicles. Furthermore, subsidies for fuel cell demonstration cities began to be distributed at the beginning of '24. We believe that support for fuel cell vehicles on the policy side is expected to guarantee continued sales growth in 24 years. We expect sales to reach nearly 10,000 vehicles in 24, an increase of more than 60% over the previous year.

Profitability declined slightly, and expenses were well controlled during the period. In terms of profitability, product sales prices dropped significantly in 4Q23 due to the volume of the industry at the end of the year. The company's gross margin fell 9.9% to 29.4% month-on-month. 1Q24 compounded the effects of lower capacity utilization, and the company's gross margin turned negative. In terms of expenses for the period, the total expenses for the 4Q23 period were 105 million yuan, down 23.9% from the previous month, and the expenses for the 1Q24 period were 95 million yuan, down 9.9% from the previous month. Overall cost control was good.

Profit forecasting and valuation

Due to industry price cuts, we lowered 2024 net profit from -66 million yuan to -207 million yuan, while introducing 2025 net profit of -125 million yuan. The current stock price corresponds to 4.9 times 2024 EV/S and 3.7 times 2025 EV/S. We are optimistic about the future development of the hydrogen energy industry and maintain the industry rating, but due to the decline in the industry's valuation center, we lowered our target price by 31% to 45 yuan, corresponding 6.2 times 2024 EV/S and 4.7 times 2025 EV/S, which has 22% upside compared to the current stock price.

risks

The promotion of hydrogen energy policies in various regions fell short of expectations, fuel cell vehicle sales fell short of expectations, and industry competition exacerbated the decline in profitability.