The 2023 results fell short of market expectations, and the 1Q24 results were in line with our expectations

The company announced its 2023 and 1Q24 results: revenue for 2023 was 4.872 billion yuan, down 8.2% year on year; net profit loss to mother was 229 million yuan, lower than market expectations, mainly due to a decrease in the gross margin of photovoltaic film and large fluctuations in raw material particle prices, due to large inventory price losses. 1Q24's revenue was 887 million yuan, -35% year-on-year, -5% month-on-month, and net profit loss to mother of 19 million yuan, in line with our expectations.

The company's 1Q24 expense ratio increased. The cost rate for the sales period was 7.91%, +2.45ppt, and the management/finance/R&D/sales expense ratios were 1.65%/2.12%/3.9%/0.23%, respectively, +0.94/+0.55/+0.97/-0.03ppt. The increase in management expenses was mainly due to increased management personnel and depreciation expenses. The increase in financial expenses was mainly due to the increase in interest expenses on the company's convertible bonds and bill interest rates.

Development trends

The company's performance in 2023 is under pressure, and earnings are expected to continue to recover this year. The company's adhesive film sales volume in '23 was 560 million square meters, +29.44% year-on-year, with a year-on-year decline of 4.36ppt, mainly due to falling film prices and fluctuations in raw material prices, which put pressure on profitability. We estimate that the average sales price of adhesive film in '23 was 8.53 yuan/square meter, or -42% YoY. Furthermore, the non-photovoltaic business is heavily invested and has not yet begun to contribute to profits. After the Spring Festival this year, along with a sharp increase in component production schedules, increased film shipments in March, and prices rebounded, we expect the company's film profits to enter the repair channel this year. In terms of production capacity, the company went overseas to expand production. The company expects the Vietnam project to be put into operation in 3Q24. We expect the company's adhesive film production capacity to reach 1.05 billion square meters by the end of the year. On the technical side, the company follows the development trend of N-type components, continues to improve film quality, supplies white co-extruded film products in batches, launches skin masks used in 0bb, and independently synthesizes light transfer agents. In terms of raw materials, the company's high-price particle impairment has been calculated in 2023, and actively manages inventory to increase inventory turnover. It is expected to go light this year, and we expect the particle price fluctuation in 2024 to be less than in 2023, so the impact of cost fluctuations on film profits has weakened.

The new automotive materials business is progressing steadily, creating a second growth curve in performance. The company vigorously laid out the new automotive materials business in 2023, and has now made breakthrough progress. The XPO artificial leather surface material innovatively developed by the company has obtained certification and orders from overseas NEV companies, and batch supply has now begun. Other products such as PVE glass adhesive film and dimming film have been launched. We believe that the company has the ability to industrialize this business. We are optimistic about the volume of the new automotive materials business this year, which will make a positive contribution to profits.

Profit forecasting and valuation

The profit forecast for 2024/2025 remains largely unchanged. Keep the industry rating and target price unchanged at 55.31 yuan, corresponding to the 2024/2025 price-earnings ratio of 35/30 times. There is 43% room to rise compared to the current stock price. The current stock price corresponds to the 23/20 times price-earnings ratio in 2024/2025.

risks

Downstream demand falls short of expectations, risk of raw material price fluctuations, and industry competition exacerbates the risk.