Incident The company released an annual report and a quarterly report. In 2023, the company achieved revenue of 16.436 billion yuan, YOY +41.8%; net profit to mother - 1,868 billion yuan, and losses increased. 2023Q4 achieved revenue of 5.205 billion yuan, YOY +76.0%, +22.5% month-on-month; realized net profit to mother of 305 million yuan, a year-on-year loss of 345 million yuan, and a month-on-month loss of 461 million yuan. The company ships more than 16 GWh of power batteries throughout the year, with YOY +50%. 2024Q1 achieved revenue of 2,924 million yuan, YOY -21.7%, or -43.8% month-on-month; realized net profit to mother of 271 million yuan, a year-on-year loss of 134 million yuan, and a further loss of 87 million yuan month-on-month.

Comment:

Inventory digestion of high-priced raw materials has been completed, and profitability has been restored. The company's 2024Q1 inventory was 3.282 billion yuan, a significant decrease from 7.279 billion yuan at the end of 2022. The company's overall gross margin for 2023Q1-3 was dragged down by high-priced raw material inventories, which were 1.91%/2.86%/5.17%, respectively. The overall gross margin of 2023Q4 and 2024Q1 increased to 14.24%/11.89%, which is a significant improvement. The decline in 2024Q1 gross margin was mainly due to high depreciation and amortization due to insufficient operating rate of the company in 2024Q1 (only 50%). Prior to SPS mass production, the company's customer structure was dominated by overseas customers, with high-margin two-wheeler products. We expect the company's gross margin to improve further.

Mass production of SPS's leading products within the year is expected to enhance the cost competitiveness of the company's soft pack batteries. The company's SPS production capacity achieved a sharp reduction in equipment investment, labor, energy consumption, plant area, etc., reduced battery material costs through large cell design, reduced overall package costs, and reduced overall package costs through CTP-based module removal technology. Semi-solid batteries have great potential for commercialization. Currently, solid electrolytes are brittle and hard. The soft pack lamination process is an ideal structure for solid-state batteries. SPS can be flexibly compatible with semi-solid batteries and all-solid-state batteries to meet customer platformization and other generalized and low-cost development needs. Currently, the company's SPS lithium iron battery has been designated by Geely Radar.

The impact of non-operating losses on performance is weakening. In 2023, the company's shareholding company SIRO lost money due to declining production capacity and supply chain issues. After the 2024 price adjustment, we expect SIRO's loss to narrow significantly. Furthermore, the impact of falling prices on the company's inventory and net income from changes in fair value weakened.

Investment advice: The company's soft-pack laminated batteries meet the needs of high-energy density and high-ratio scenarios and are expected to benefit the development of the low-altitude economy. We expect the company's net profit for 2024-2026 to be 134/7.46/1,075 million yuan, up -/ 457.11%/44.04% year-on-year, EPS 0.11/0.61/0.88 yuan, and corresponding PE is 117/21/15 times, respectively, maintaining the “buy” rating.

Risk warning: The risk that SPS promotion falls short of expectations, and the risk that performance forecasts and valuation judgments fall short of expectations.