1H23 performance is basically in line with market expectations

The company announced 1H23 results. Revenue reached 6.1 billion yuan, a decrease of 9.6%, and net profit of 1,117 million yuan, a decrease of 96.5%. The results for the first half of the year were in line with the previous performance forecast range. On a quarterly basis, 1Q/2Q23 revenue was +5.6%/-23.2%, respectively, and net profit was +237.6% /loss over the same period.

We expect that as the shipping price of film in the industry rises steadily and the company's new customers gain success, the capacity utilization rate of the company's photovoltaic film business is expected to increase significantly from July, and subsequent shipments and profitability are expected to improve.

Development trends

1. The photovoltaic film business is expected to resume rapid growth in the future, and business structures such as hot melt adhesives continue to be optimized. View by business: 1) Photovoltaic film: In the context of EVA particle prices and industry film shipping prices falling, the company's Q2 photovoltaic film revenue fell 39%, sales volume fell by 1%, and shipping prices fell by 39%, but we expect the share of POE and other shipments to increase markedly. Following the smooth introduction of new customers, the consumption of high-cost inventory, and a steady rise in industry particle prices, the operating rate and profitability of the photovoltaic film business have increased significantly since July; 2) Hot melt adhesives, electronic adhesives: Q2 Revenue -12%/+16% YoY, we expect the company Continuously optimize the product structure, focus on major customers, and lead the improvement of profitability.

2. High-cost inventories drag down Q2's profitability in the short term, and improvements are expected in the future. The company's Q2 gross margin achieved 19.6%, a decrease of 1.5 ppt. According to Baichuan Yingfu, the average price of EVA particles Q2 fell 10.3% month-on-month, the company's inventory cost was running at a relatively high level, and the overall gross profit margin was dragged down in the context of declining industry shipping prices. We expect subsequent profitability to improve as industry particle prices stabilize and the company's high-priced inventory consumption is complete, and with product structure optimization, gross margin for hot melt adhesives and other businesses is expected to continue to improve; on the cost side, sales/management/financial expenses are expected to continue to improve. Continued performance is expected to improve.

3. As the shipping price of adhesive film stabilizes and improves, new customer acquisition and production capacity expansion go smoothly, subsequent performance is expected to improve. We are optimistic about the company's prospects of becoming the first tier in the photovoltaic film industry in the medium to long term. We believe that the overall competitive advantage of the company's photovoltaic film business is outstanding. We expect: 1) As particle prices rise steadily and shipping prices improve, the company's major customers will be successfully obtained from July and capacity utilization will return to a high level, which is expected to lead to subsequent revenue and profitability improvements; 2) The company's production ceiling continues to break through, and the annual production capacity is expected to rise rapidly from the current 160 million square meters to 5.1 million square meters by the end of 2024. The production capacity share of high-margin products such as POE film will also continue to rise in the medium to long term.

Profit forecasting and valuation

Considering the company's operating pressure in Q2, the company's fundamentals are expected to gradually improve starting in July. We lowered our 2023/2024 profit forecast by 51%/22% to 130 million yuan. The current stock price corresponds to 34/12 times P/E for 2023/2024, maintaining the outperforming industry rating. Based on profit forecast adjustments and the company's subsequent management improvements, we lowered the target price by 27% to 11.7 yuan, corresponding to 49/17 times P/E in 2023/2024. There is 45% room for increase.

risks

Terminal demand fell short of expectations; raw material prices fluctuated; operating cash flow was under pressure.