Matters:

The company released its report for the third quarter of 2024. In the first three quarters, the company achieved operating income of 49.946 billion yuan, an increase of 7.6% year on year; net profit to mother was 7.6 billion yuan, an increase of 5.2% year on year. In the third quarter, the company achieved revenue of 18.926 billion yuan, an increase of 6.4%/2.8%, respectively; net profit to mother was 2.64 billion yuan, a decrease of 8.0%/7.8%, respectively.

Ping An's point of view:

The company's revenue is growing steadily, and revenue recognition is lagging behind, and is awaiting subsequent release. In the first three quarters, the company achieved revenue of 49.946 billion yuan, a year-on-year increase of 7.6%; in the third quarter, the company achieved revenue of 18.926 billion yuan, an increase of 6.4%/2.8% year-on-month, respectively. The company's optical storage business is progressing smoothly. The revenue recognition process lags behind actual delivery. The revenue increase in the third quarter was small, and the results are expected to be released after subsequent revenue is confirmed. According to the company's announcement, the company's large storage business is a project system. The revenue recognition cycle is long, and there are large differences in the acceptance cycle of different projects, depending on the specific contract terms.

The company's energy storage shipments continued to grow year over year. Due to delays in revenue recognition, revenue recognition for third-quarter shipments may be delayed until the fourth quarter or 2025.

The company's profitability remains excellent. 1) Gross profit margin: The company's gross sales margin for the first three quarters was 31.3%, an increase of 2.9 pct over the same period in 2023 (adjusted according to accounting standards), mainly due to the company's brand premium, product innovation, scale effect and improved project management capabilities. Looking at a single quarter, the company's gross margin for the first three quarters was 36.7%/29.5%, respectively, and the gross margin for the second and third quarters was lower than in the first quarter. We estimate that mainly due to changes in revenue structure, the growth rate of the Asia-Pacific market was higher than that of the European and American markets, and the company's domestic and Asia-Pacific inverter revenue share increased, causing the average gross margin to decline.

2) Expense side: In the first three quarters, the company's four major cost rates for sales, management, R&D, and finance totaled 12.6% (after adjustment according to accounting standards), an increase of 3.3 pct over the same period in 2023. The company's sales expense ratio for the first three quarters was 5.6%, an increase of 1.3 pct over the same period in 2023, mainly due to an increase in business development and sales staff remuneration; an increase of 1.0 pct in R&D expenses, mainly due to the company's continued increase in R&D investment, material and labor costs; and an increase of 0.7 pct in financial expenses, mainly due to a decrease in exchange earnings in the current period. The increase in various expense rates is also affected to a certain extent by the company's delay in revenue recognition. It is expected that the fee rate will gradually be diluted as revenue is gradually recognized. 3) Net profit: In the first three quarters of 2024, the company achieved net profit of 7.6 billion yuan to mother, an increase of 5.2% over the previous year. In the third quarter, the company achieved net profit of 2.64 billion yuan, a year-on-month decrease of 8.0%/7.8%, respectively. The company's net profit for the third quarter declined year-on-month, mainly due to a decline in gross margin due to changes in the revenue structure and an increase in the expense ratio.

Cash flow rebounded markedly in the third quarter and is expected to continue to improve in the future. The net net cash flow from the company's operating activities in the first three quarters was 0.8 billion yuan, a decrease of 3.75 billion yuan from the same period in 2023, mainly due to an increase in inventory and accounts receivable, and an increase in the capital occupied. Furthermore, the settlement of corporate income tax payments in the first half of the year, as well as the increase in various taxes due to business growth, also had a certain impact on the company's cash flow situation. By the end of the third quarter, the company's inventory balance was 32.2 billion yuan, up 10.7 billion yuan from the beginning of the year. Mainly due to an increase in the number of ground power plant projects under construction, the construction and grid connection cycle was relatively long; the second was the increase in the company's household photovoltaic business inventory. The rest of the growth was mainly due to the company's overseas business. In order to meet the demand for overseas energy storage order delivery, factories and overseas in-transit inventories increased. Looking at a single quarter, the company's net operating cash flow for Q1-Q3 was -4.9/-21.2/+3.41 billion yuan, respectively. It recovered in the third quarter and increased 5.5 billion yuan from the second quarter, which has improved significantly. With the continued delivery of the Q4 power plant project and overseas projects, repayments increase, and the company's cash flow is expected to continue to improve.

The plan is to issue overseas depository certificates to expand global production capacity and consolidate competitive advantages. On October 30, the company's application for issuing additional domestic basic A-shares in GDR was accepted by the Shenzhen Stock Exchange. The company plans to issue GDR and apply for listing on the German Stock Exchange. The capital raised will be in US dollars, and the total capital raised will not exceed RMB 4.9 billion after conversion, for an annual output of 20 GWh advanced energy storage equipment manufacturing projects (total investment scale of 2 billion yuan), overseas inverter equipment and energy storage product expansion projects (total investment scale of 1.8 billion yuan), digital upgrading projects (total investment scale of 0.6 billion yuan), and Nanjing R&D center construction project (total investment scale of 0.5 billion yuan). After the construction of the fund-raising project is completed, the company will add 35 GWh of energy storage products and 50 GW inverter equipment production capacity per year, which will help consolidate the company's energy storage business advantages, form a production-side scale effect, optimize the global production capacity structure, enhance the company's global delivery capacity and flexibility, and actively respond to trade risks.

Investment advice: The company's optical storage inverters are two-wheel drive, and the stability and sustainability of future profits is still excellent. As a leading global optical storage inverter company, the company has plenty of orders on hand and is highly competitive in the global market. The global storage market is booming. The company's energy storage business advantages are outstanding, the PV business is growing steadily, and profitability is expected to remain excellent. We raised our profit forecast. The company's net profit for 2024/2025/2026 is 11.891/14.559/16.195 billion yuan, respectively (previous value was 11.884/13.783/14.617 billion yuan), corresponding to the closing price of PE on November 1, 15.4/12.6/11.3 times, respectively. We believe that as demand for optical storage in emerging markets continues to increase, the company's dependence on individual markets is expected to further decrease, and future profits will continue to be excellent, and maintain a “recommended” rating.

Risk warning: (1) The risk that demand in the energy storage market will not grow as much as expected. Under the global carbon neutrality vision, the growth of the major storage markets in China, the US, and Europe is quite certain; however, if factors such as grid-connected queues and industrial chain restrictions cause installed capacity to fall short of expectations, or changes in tax reduction and subsidy policies, the energy storage market may fall short of expectations, affecting the company's energy storage system related performance. (2) The risk of tightening overseas trade policies. Recently, there are signs of tightening the US trade policy on parts of China's photovoltaic and lithium battery industry chain. If the US subsequently imposes sanctions in the form of tariffs on photovoltaic inverters, energy storage systems, etc., or if the European market imitates its practices to tighten trade policies, it may affect the company's business development in these markets. (3) The risk of increased competition in the global market. If competition in the photovoltaic inverter and energy storage system markets intensifies and price wars occur in the future, the company's market development and profits may be affected to a certain extent. (4) The risk of changes in the revenue model of new energy power plant projects. If the company's NEV revenue model changes due to market or policy factors, it may have a certain impact on the company's profit.