Performance review
1H23 performance fell short of our expectations
The company announced 1H23 results: 1H23 achieved revenue of 7.1 billion yuan, +15% year on year, net profit of 80 million yuan, +80% year on year; 2Q23's quarterly revenue was 380 million yuan, +26% year on month, +16%, 2Q23's net profit for the single quarter was 47 million yuan, +47% year on year, +27% month on month, slightly lower than our expectations, mainly because 1H23 demand fell slightly short of expectations and the price side was slightly under pressure.
The share of chip junction boxes has increased, profitability has been greatly restored, and revenue growth has fallen slightly short of expectations.
1H23's diode junction box/chip junction box/photovoltaic interconnection wiring harness revenue was +12%/34%/17% year-on-year, respectively, to 4.8/16/50 million yuan. The share of the company's new chip junction boxes increased further, but overall revenue growth was slightly lower than expected, or the price of auxiliary materials was under downward pressure due to the rapid decline in 1H23 component prices and profit pressure. In terms of profitability, benefiting from falling raw material prices, the gross margin of junction boxes has been greatly restored. Among them, chip junction boxes still have a profit advantage. 1H23's diode junction box/chip junction box gross margin was +9.6/7.5ppt to 20.6%/23.5% year-on-year, respectively.
Expense rates increased slightly during the period, and cash flow turned negative year on year. The company's cost investment was relatively steady, but revenue growth was slightly lower than expected, so the cost ratio increased slightly year on year. 1H23's sales/management/R&D/financial expense ratio was +0.1/+1.3/+1.6/-0.6ppt to 0.3%/4.0%/5.0%/-1.0%. On the cash flow side, due to the continuous expansion of the company's size, the advance demand increased slightly. 1H23's operating cash flow turned negative to -50 million yuan.
Development trends
Optimistic about increasing component production schedules will drive demand upward, and promote overseas production expansion to strengthen customer partnerships. According to PV Infolink data, the operating rate of the top 10 component factories in July-September was +2/+10/+0ppt, respectively, and the operating rate of the rest of the domestic component factories was +6/+10/+2 ppt month-on-month. We believe the increase in production schedules will drive demand for components and auxiliary materials such as junction boxes to continue to rise. According to the company's announcement, in the future, the company will promote the construction of a factory in Vietnam by combining the overall strategy with market customer demand planning. We believe that expanding production capacity to Vietnam can more conveniently support downstream component production capacity in Southeast Asia. According to the company's disclosure, the company and Tongwei have begun formal cooperation to supply junction box products. Among them, chip junction box type products are still being actively expanded and negotiated. We are optimistic that the company's chip junction boxes will further open up the market with better cost performance and achieve a further increase in market share.
Profit forecasting and valuation
Since 1H23 demand is slightly lower than expected, and the profitability of downstream components is under pressure or indirectly transmitted to the price drop on the auxiliary materials side, we lowered 2023/2024E net profit by 14%/16% to 2.2/3.1 billion yuan. The current stock price corresponds to 24/17 times the price-earnings ratio in 2023/2024, maintaining an outperforming industry rating. Considering the pressure on the industry valuation center, the target price was lowered by 24% to 56 yuan, corresponding to the price-earnings ratio of 31/21 in 2023/2024, implying 27% upside.
risks
The increase in component production schedules fell short of expectations, the downward pressure on prices exceeded expectations, and the promotion of new products fell short of expectations.