1H24 results fall short of market expectations

The company announced 1H24 results: revenue of 3.75 billion yuan, -7.3% year-on-year; net profit to mother of 0.144 billion yuan, -28.5% year-on-year. That is, 2Q24 revenue was 1.802 billion yuan, -15.7% YoY, -7.4% month-on-month; net profit to mother was 0.066 billion yuan, -32.9% YoY and -16.4%. The performance fell short of market expectations, mainly due to 1H24 Haishida's losses, and the profit of the energy storage business fell short of expectations.

Development trends

The modified plastics business is profitable and production capacity is expected to maintain high growth. Prices of 1H24 modified plastic raw materials are rising, and PP/ABS/PE/PC prices are +2%/-1% compared to FY23; the gross profit margin of the company's 1H24 general and engineering modified plastics is 19.1%, compared with FY23+0.8ppt, and the profit level is stable.

According to the company's announcement, the company currently has a modified plastic production capacity of 0.43 million tons and a production capacity under construction of 0.2 million tons; of these, the annual production capacity of the Tianjin project will not be less than 0.12 million tons, and the annual production capacity achieved through environmentally friendly recycled materials will not be less than 0.03 million tons. The company plans to start production in mid-2025. In addition, the company has accelerated the expansion of overseas business, and 1H24 has begun preparations to build production bases in Mexico and Thailand respectively. We expect the company's modified plastics business to maintain high growth.

Profits in the energy storage business are low, and new production capacity is expected to be gradually released. The profit of 1H24's energy storage business declined, and Haishida lost 0.071 billion yuan (-0.07 billion yuan). Among them, the gross margin of ternary cylinder/lithium iron phosphate lithium ion batteries was -15.6pp/ -7.8ppt year-on-year, respectively. Competition in the energy storage industry was fierce in the first half of the year, and product prices declined. We expect that in the future, with the digestion of the industry's production capacity, the company's energy storage business profits are expected to return to a reasonable level. According to the company's announcement, the company is currently actively promoting the layout of sodium-ion batteries. The company currently has a battery production capacity of 5.3 GWh and is under construction, all of which are compatible with the production of sodium/lithium ion batteries. Among them, the Qidong base is scheduled to be put into operation in 3Q24, and the Zhuhai base is scheduled to be put into operation in 4Q24. In addition, the company continues to accelerate the promotion of energy storage business applications. According to the company announcement, 1H24 Highstar and Shanghai Hirano have now signed a framework contract for the purchase and sale of sodium battery products with a total volume of not less than 1.5 GWh, which is scheduled to be delivered in batches from May 2024 to December 2026. We expect to make a positive contribution to the promotion and profit of the company's energy storage business.

The LCP business may enter a critical period of industrialization. The company has been working in the LCP field for many years. According to the company's announcement, the company's LCP film products have successively received small-batch purchase orders from many customers, and is currently actively carrying out product verification work with core industrial terminal customers. We believe that with the commercialization of the millimeter-wave band in the future, LCP materials are expected to usher in a critical period of industrialization.

Profit forecasting and valuation

Due to the low profitability of the energy storage business, we cut our net profit for 2024 and 2025 by 35.9% and 21.7% to 0.358 billion yuan and 605 million yuan. The current stock price corresponds to 22.9 times the 2024 price-earnings ratio and 13.6 times the 2025 price-earnings ratio. Maintaining an outperforming industry rating, we lowered our target price by 26.3% to 8.7 yuan, which corresponds to 27.0 times the price-earnings ratio of 2024 and 16.0 times the price-earnings ratio of 2025. There is 18.0% upside compared to the current stock price.

risks

Prices of modified plastic raw materials have risen, the restoration of the energy storage market has fallen short of expectations, and the commissioning of new projects has fallen short of expectations.