Event: On October 27, the company released its report for the third quarter of 2023. In the first three quarters of 2023, the company achieved operating income of 5739.44 million yuan, a year-on-year decrease of 11.73%, and net profit of 274.65 million yuan, a year-on-year decrease of 38.02%. In the third quarter of 2023, the company achieved revenue of 136.4.85 million yuan in a single quarter, a year-on-year decrease of 43.99%, and net profit of 23.35 million yuan, a year-on-year decrease of 88.28%.

Shipment expectations in the energy storage market have been lowered, and corporate profit levels are under pressure. In the first three quarters of 2023, the company's net sales profit margin was 4.97%, down 2.0pct from the same period last year, and gross sales margin was 18.58%, down 0.3 pct year on year. According to data from GGII, in the first three quarters of 2023, China shipped 127 GWh of energy storage lithium batteries, an increase of 44% over the previous year. Among them, the shipment volume for the third quarter was about 40 GWh, down 33% from the previous month, and the annual shipment volume forecast was lowered to 180 GWh, down about 1/4 from the target expected at the beginning of the year of 230 GWh. Looking at the production side, the decline in lithium carbonate prices is the main factor. The price of battery-grade lithium carbonate continues to fluctuate and fall. Currently, the 99.5% battery-grade lithium carbonate price is 169,500 yuan/ton, down 70% from last year's high of 570,000 yuan/ton. Lithium carbonate accounts for about 30%-40% of the cost of energy storage batteries. The continued decline in lithium carbonate prices allows companies to adopt lower pricing. On the other hand, based on high growth expectations in the energy storage market, this year, more than 40 raw material companies upstream and downstream of the energy storage industry chain announced their latest plans to expand production. Falling prices and the crazy expansion of the industry The resulting decline in product prices puts pressure on a company's profitability. From the demand side, China's exports of lithium batteries for energy storage are high, and grid-connection rules for some European and American countries have not yet been fully established. The process is complicated, leading to expensive postponed projects. Electricity prices in Europe are low, and the US has raised interest rates several times this year, affecting the growth of market demand. This has led to a large backlog of channel vendors, which have continued to remove inventory since the beginning of the year, putting pressure on profits. At the same time, the scale of domestic tenders for central enterprises and state-owned enterprises represented by “five big, six small, two buildings” has expanded, relieving the pressure on corporate profits to a certain extent.

Production capacity expansion has been steadily implemented, and future profit growth can be expected. In the third quarter of the company, projects under construction increased by 444.24%, and long-term amortized expenses increased by 52.23%, mainly due to an increase in the construction and renovation of new projects. On July 5, the second phase of the Penghui Quzhou Smart Energy Storage Manufacturing Base project officially began; on August 8, the first batch of energy storage batteries at the Quzhou Smart Energy Storage Manufacturing Base went offline, and smart batteries officially entered the mass production and delivery stage, striving to achieve full production within three months; on September 26, the Penghui Qingdao energy storage battery zero-carbon manufacturing base officially began construction, with an overall planned production capacity of 36 GWh. The first phase of the project has a production capacity of 12 GWh, and is scheduled to be put into operation by the end of December 2024. The energy storage market has broad prospects. The company plans ahead of schedule to expand production capacity, laying a solid foundation for future growth.

The company's cash flow is healthy, and share repurchases demonstrate corporate confidence. The net cash flow from the company's operating activities in the third quarter increased by 117.02% compared to the same period last year, mainly due to the company's good repayment situation and improved working capital turnover efficiency. The net cash flow from fund-raising activities increased by 608.97% over the same period last year, mainly due to an increase in stock issuance and project loans to specific targets. On October 25, the company issued an announcement to repurchase the company's shares of 50 to 60 million yuan to implement subsequent employee stock ownership plans or equity incentives. The maximum repurchase price is 50 yuan/share (inclusive). The company's repurchase announcement shows confidence in future business growth, and market sentiment is expected to continue to improve.

Investment advice: Compared with 2022 benefiting from the high demand brought about by international tension, the overall demand growth in the energy storage industry in 2023 was relatively steady, and early inventories are still being digested. As a leading enterprise in household energy storage, the company has a strong first-mover advantage, has a leading technical level in the industry, and is actively expanding fields such as industrial and commercial energy storage, with full potential for future revenue growth. We forecast that the company's net profit from 2023 to 2025 will be 740 million yuan, 1.06 billion yuan, and 1.58 billion yuan respectively, and corresponding PE will be 31 times, 22 times, and 14 times, respectively, for the first “increase in holdings” rating.

Risk warning: increased competition in the energy storage industry, price fluctuations of battery raw materials, overseas policy risks, macroeconomic fluctuations