2023: From the perspective of freight, exchange rates, and costs, the reason for the increase in dismantling profit in 2023, Sunshine Power's performance continued to exceed expectations. The company achieved net profit of 9.44 billion yuan for the whole year, an increase of 163% over the previous year, mainly because the profit level exceeded expectations. The gross margin of the 2023 inverter reached 37.9%, up 4.7 pcts year on year; the gross margin of the energy storage system reached 37.5%, up 14.2 pcts year on year. Looking further, the reasons why the company's profit level exceeded expectations include not only the company's own cost reduction, optimization of the market structure and product structure, but also “chance” factors such as exchange rates, freight, falling raw materials, and tight IGBT modules. We tried to quantify the impact of these factors. The results showed that the 2023 exchange rate and freight are expected to contribute 3-5 pcts to both the inverter and energy storage business, and the drop in lithium carbonate prices also contributed more than 5 pcts to the energy storage business. After excluding the above influencing factors, we expect the “real” gross margins of the company's inverters and energy storage to be 33%-35% and 27%-30% respectively in 2023. Compared with 33.2% and 23.2% in 2022, the actual gross margin of inverters has been stable or slightly increased, and the gross margin of energy storage will still increase slightly.

2024: From the perspective of the market & product structure and cost rate, the quarterly trend rhythm is different from the market view. We believe that with product/market structure optimization, further highlighting of scale effects, and the benefits of lower lithium carbonate prices, etc., the company's profit level is expected to remain at a relatively high level in 2024. Among them: 1) In the inverter business, gross margin is expected to be around 35% in 2024, a year-on-year decrease of 3 pcts or less. One of its core supports is the product structure. The company's share of channel shipments is expected to continue to increase. We estimate that if the company's channel product shipment ratio increases from 30% to 40%, the corresponding net profit per watt can increase by about 0.4 points/W; the second is the market structure, we expect the company's overseas gross margin to exceed 40% and domestic 15% to 20%, so the increase in overseas share is also conducive to improving profitability. 2) The energy storage business is expected to have a gross margin of more than 30% and a net profit margin of more than 15% for the whole year. One of its core supports is the market structure. Subsequent companies are actively developing overseas markets such as the US, Europe, and the Asia-Pacific region, increasing their share of high-profit markets; the second is scale expansion, which helps the company reduce procurement costs and dilute expenses during the period. We expect the company's energy storage business period to decrease by 1-2 pct year-on-year in the 2024 energy storage business period. In addition, the drop in the price of lithium carbonate is also expected to keep the company's 2024H1 energy storage profitability high. Overall, the company's annual gross margin may show a quarterly downward trend, but the decline is quite limited. Considering the quarterly increase in volume, the quarterly results are expected to remain impressive, and there is no shortage of possibilities for further improvement in the annual results.

2025 and beyond: From the perspective of competitive factors, deducing the profit center in 2025 and beyond, how should Sunshine Power's reasonable profit center be anticipated? This issue directly determines the company's long-term performance and space. We believe that in the future, the gross margin of Sunshine Power's inverter business will be around 30%-35%, the net profit center of a single watt will be 3-4 minutes/W, the gross margin center of the energy storage business will be 25%-30%, and the net interest rate center will be above 12%. We believe that the key to supporting its profit level is the high barriers and better pattern of overseas large machines: 1) For overseas large machines, global after-sales service capabilities, brand, product quality and reliability are the main competitive factors, and Sunshine Power has obvious advantages in these areas. We believe that it is reasonable and sustainable for the company to maintain a gross margin of around 40% or even higher for overseas large machines. 2) For overseas large reserves, as a “necessary and necessary” systematic project, the entry threshold has been greatly raised. Sunshine Power “did it early”, “did a good job”, and “did a comprehensive job” in the field of energy storage, leading domestic peers in international services, brands, products, technology, etc., and also has certain advantages over leading overseas companies. Subsequently, with the expansion of the market size, the increase in trade barriers, and the advancement of product technology, inverters and large storage systems are expected to maintain high industry barriers, supporting Sunshine Power to have considerable profit margins.

In summary, we expect the company to achieve net profit of 10.9 billion yuan and 13 billion yuan respectively in 2024-2025, corresponding to PE 14 and 12 times. Maintain a “buy” rating.

Risk warning

1. Global PV and energy storage installations fall short of expectations; 2. The competitive landscape has deteriorated; 3. Overseas trade barriers have further increased; 4. Profit forecast assumptions are unfounded or fall short of expectations.