Description of the event

Sanlifu released its report for the third quarter of 2024. During the reporting period, the company achieved operating income of 1.873 billion yuan, an increase of 21.72% over the previous year; achieved net profit of 0.065 billion yuan, an increase of 10.88% over the previous year; and realized net profit of 0.073 billion yuan without return to mother, an increase of 75.23% over the previous year. Non-recurring profits and losses are mainly government grants of 3 million yuan, profit and loss from changes in the fair value of financial assets/liabilities of 7.57 million yuan, and non-operating expenses of 5.19 million yuan.

Incident comments

The company's business scale continued to reach new highs, with revenue of 0.69 billion yuan in the third quarter, up 21.77% year on year and 7.76% month on month. Production capacity projects such as Longgang and Putian support the company's continued increase in market share. Net profit for the third quarter of a single quarter was 0.009 billion yuan, down 72.78% year on year and 61.91% month on month, mainly due to pressure on exchange and financial expenses. In terms of profit level, the gross profit margin for the third quarter was 16.31%, up 1.2 pct year on year and 1.89 pct month on month; net sales margin was 1.36%, down 4.71 pct year on year and 2.49 pct month on month. Beginning in July, the yen exchange rate appreciated rapidly in anticipation of interest rate hikes. In the third quarter, the exchange rate of the yen rose from a maximum of 100:4.45 to 100:5.04, with an increase of more than 13%. The company's financial expenses for the third quarter were 0.045 billion yuan, accounting for 6.55% of the quarter's revenue, which had a significant impact on short-term profits.

Considering that the current exchange rate of yen to RMB has fallen to around 100:4.68, the impact is expected to be drastically reduced in the fourth quarter. Subsequent companies can also reduce the impact of exchange fluctuations by increasing hedging.

We believe that the main focus of the next company is on three aspects: 1) The launch of new production capacity in the second phase of Hefei. As of September 30, the project investment progress was 81.28%. Due to external environmental factors, including supplier delivery speed, material logistics transportation, site construction, etc., the original production target of October 31, 2024 was changed to March 31, 2025. The width of 1,720 mm is suitable for cutting 65-inch TV panels, which is expected to improve the profit margin of the company's large-scale business; 2) The industry's leading domestic material supply system. The company continues to advance key technical research and innovative product development, and Anhui Jiguang New Materials, which is a shareholder, is promoting the TAC film production expansion project. The company aims to achieve an increase in sales of high-end products made of chemical materials nationwide, which is expected to become the key to maintaining a cost advantage in the later stages of domestic substitution; 3) Flexible OLEDs take the lead in achieving breakthroughs in domestic substitution. The company successfully developed a circular offset for small to medium size 3D solid curved flexible AMOLEDs and achieved mass production in the Q1 quarter of 2024. In addition, in terms of automotive polarizers, the company can also provide automotive iodine polarizer and dye-based polarizer product solutions; polarizer products used in differentiated applications such as semi-reflective eye protection LCDs, AR/VR folding light paths, AR-HUD, and light field screens are also continuing to be iterated or developed.

We believe that since the panel industry chain entered a downward cycle in 2021, when downstream panel manufacturing profits were under pressure, upstream materials were also under obvious price reduction pressure. However, with the restoration of the downstream price center after production in 2024 and the reduction of depreciation costs, the profitability of polarizers is expected to be repaired in the long term. Considering revisions to financial expenses and the schedule of the second phase of Hefei, we expect the company's 2024-2026 EPS to be 0.59, 1.18, and 2.06, with corresponding PE 41.04, 20.45, and 11.66, respectively.

Risk warning

1. Consumer electronics recovery falls short of expectations;

2. New product release progress falls short of expectations.