Incident: The company disclosed its 2023 annual report, achieving full year operating income of 75.589 billion yuan, a year-on-year increase of 2.3%; achieved net profit of 1,118 billion yuan, a year-on-year decrease of 7.5%; realized net profit without return to mother of 1,308 billion yuan, an increase of 16.6% over the previous year; and achieved basic earnings per share of 0.56 yuan/share, a year-on-year decrease of 9.7%. On a quarterly basis, revenue of 6.234 billion yuan was achieved in the fourth quarter, down 75.7% from quarter to quarter; net profit to mother was 148 million yuan, down 41.5% from quarter to quarter. Overall, as demand in the copper processing industry was constrained by the sluggish real estate economy and oversupply in the battery copper foil market, the company's profitability declined significantly in the second half of the year; in the future, along with the acceleration of domestic production capacity in the battery copper foil sector, combined with the company's “raw materials+processing fee” pricing model, the new energy lithium copper foil sector may provide considerable profit elasticity.
The gross margin of the traditional copper processing sector remained stable, while the profitability of the lithium battery copper foil sector declined year-on-year. In 2023, the company produced a total of 851,000 tons of processed copper materials, down 1.64% year on year, with a total sales volume of 85.3 tons, down 1.36% year on year. Overall, the company's gross profit per ton of copper processed materials was about 3,088 yuan/ton, compared with the gross profit per ton of copper processed materials in 2022, down 2.5% year on year. In 2023, the company's overall gross margin of copper processed materials was about 5.41%, down 0.19% year on year; by product: annual gross margins of copper pipes, copper bars, copper bars, and copper foil were 6.1%/-24.2%, respectively, +0.3%/-0.1%/-31.2% year over year; among them, the gross margin of traditional copper processing materials (including copper pipes, copper bars, and copper bars) remained stable, but the gross margin of the copper foil sector declined rapidly, dragging down the annual performance.
The oversupply of lithium battery copper foil is dragging down the company's performance in the new energy sector, and profits are expected to recover after production capacity is cleared. According to data released by the China Automobile Power Battery Industry Innovation Alliance, in 2023, China's power battery production was 778.1 GWh, up 42.5% year on year (lower than the 148.5% year-on-year growth rate in 2022); sales volume was about 616.3 GWh, up 32.4% year on year (down from the 150.3% year-on-year growth rate in 2022).
On the industry side, due to the slowdown in the growth rate of demand for downstream lithium batteries and the continued removal of stocks by major battery companies, lithium battery copper foil showed a long-term phased surplus in 2023, leading to a sharp drop in processing costs. Looking at the supply and demand pattern, according to Antec statistics, the production capacity of the lithium battery copper foil industry in 2023 was 819,000 tons, an increase of 259,000 tons, +46.25% year-on-year, and the output was 515,000 tons, +25.0% year-on-year, lower than the 50% year-on-year growth rate in 2022. Looking ahead, the decline in lithium battery copper foil processing costs will continue to slow the supply-side marginal growth rate and drive the industry's production capacity to clear. In the future, the company may fully benefit from cost competitiveness due to scale effects. Combined with the commissioning of the first phase of the 150,000-ton copper foil project in Lanzhou and the steady progress of the 100,000-ton high-performance electrolytic copper foil project in Indonesia, it is expected that profit recovery in the lithium battery copper foil sector will gradually be realized as the industry's production capacity is gradually cleared.
Investment advice: Based on the phased pressure on lithium battery copper foil processing fees affected by oversupply, the company's performance expectations were conservatively lowered; however, it is still optimistic about the cost advantage due to the company's scale effect. The company's 2024-2026 revenue is expected to be 830.98/909.74/97.055 billion yuan, net profit to mother of 13.27/15.75/1,737 billion yuan, PE 13.9/11.7/10.6 times, respectively, maintaining a “buy” rating.
Risk warning: Demand for air conditioning falls short of expectations; risk of declining processing costs; risk of falling short of expected project commissioning.