The 3Q24 performance fell short of our expectations, and the 4Q24 diaphragm business is expected to reduce losses

In 2024, 1-3Q achieved operating income of 1.003 billion yuan, YoY +8.23%; net profit to mother of 18.518 million yuan, YoY -75.26%; net profit after deducting non-return to mother of 5.021 million yuan, YoY -90.97%.

In 3Q24, the company achieved operating income of 0.356 billion yuan, QoQ +6.9%, realized net profit to mother of 1.461 million yuan, QoQ -83.4%, and realized net profit of -4.366 million yuan (QoQ converted into loss). The company deducted non-net profit and turned losses month-on-month. The main reason is that the company's diaphragms and other projects are still experiencing certain losses during the construction period. The company expects to reduce losses as production capacity is released in the future, and the performance is lower than our expectations.

Development trends

Global panel shipments in September were positive year over year. According to WitsView data, the total global panel shipment volume for 7/8/9 2024 was 18.212/18.961/19.745 million square meters (YoY -5.47%/-2.82%/+4.85%). Since entering the fourth quarter, the trade-in policy has helped the demand side of TV panels continue to improve.

According to AVC data, 24W40 (9.30-10.6) national color TV offline retail sales increased 94% year-on-year. We believe that the company is a leading supplier of reflective film for LCD panels and is expected to continue to benefit from increased panel shipments.

Profits in the lithium battery diaphragm business are under pressure. According to data from Xinyi Consulting, diaphragm prices declined further after entering 3Q24, and prices have stabilized since the fourth quarter. As of October 25, 2024, wet base film (9um) closed at 0.81 yuan/square meter (-22.8% since the beginning of the year), and dry base film (16um) reported 0.4 yuan/square meter (-20% since the beginning of the year). We expect the operating rate of the company's 3Q24 lithium battery diaphragms to remain low. As capacity utilization rises, the diaphragm business is expected to reduce losses.

Announcing employees' shareholding plans shows long-term confidence. The company announced the 2024 employee stock ownership plan (draft) on September 26. The maximum amount of capital raised is 65.64 million yuan, the transfer price is 8 yuan/share, and the total number of shares to be subscribed is 8.205 million shares. The target shares obtained by the employee were unlocked in three installments. The time of unlocking was 12 months, 24 months, and 36 months from the date the company announced the last transfer of the underlying stock to the employee's shareholding plan. The proportion of unlocked shares in each instalment was 33%, 33%, and 34%, respectively.

The employee stock ownership plan is based on 2024 net profit, and the net profit value for each assessment year is assessed against the growth rate of the 2024 net profit base. The net profit growth rate for 2025-2027 was 300%/500%/1000%, respectively.

Profit forecasting and valuation

Considering that the impact of the diaphragm business on the profit side in 2024 was higher than expected, we lowered our 2024 net profit by 64.4% to 0.039 billion yuan, and losses are expected to decrease after the diaphragm business operating rate rises in 2025. We maintain our 2025 net profit forecast of 0.156 billion yuan, corresponding to 2024/2025 EBITDA of 0.174/0.33 billion yuan, and EV/EBITDA of 28.3x/14.9x, respectively. Considering the expected recovery in the sector and the increase in the valuation center, we raised our target price by 18.6% to 17.55 yuan/share, which has 10% room to rise from the current stock price, corresponding to 16.4x EV/EBITDA in 2025.

risks

The volume and price performance of the reflective film fell short of expectations; the progress of production capacity under construction fell short of expectations.