1H23's performance met our expectations

The company announced 1H23 results: revenue of 155 million yuan, a year-on-year decrease of 43%; net profit to the mother - 76.51 million yuan. Among them, 2Q23 revenue was 105 million yuan, a year-on-year decrease of 39%, a year-on-year increase of 117%, and net profit for the parent group was 37.88 million yuan. The performance was in line with our expectations.

Development trends

Sales volume was affected by customer and regional differences, and installed capacity share declined compared to last year. According to Jiaotong Insurance data, we estimate that from January to July 2023, the company achieved 32 MW of fuel cell system installed capacity, with a domestic market share of about 12%, down from about 20% of last year's market share. We believe that mainly because the fuel cell industry is in the early stages of development, the delivery of a single major project will have a big impact on total shipments. The company's sales are concentrated in Beijing, Zhangjiakou and other regions, with government-purchased buses as the mainstream. 1H23, as the number of fuel cell vehicles purchased by the government has shrunk, the decline in demand will affect the company's shipments and revenue. We expect the second half of the year to experience high growth in line with the volume of the industry. Looking back, the fuel cell vehicle promotion goals for urban agglomerations during the four-year demonstration period are clear. Combined with the promotion plans for some non-demonstration urban agglomerations, we expect to achieve sales volume of 60,000 to 80,000 vehicles by 2025. The trend of high sales growth in recent years may be quite clear.

Laying out the hydrogen production business, it has technical advantages and is expected to take the lead in volume release. In June 2023, Yihuatong established a wholly-owned subsidiary, Beijing Yihuatong Hydrogen Energy Technology Co., Ltd., to lay out the electrolyzer equipment for upstream hydrogen production. The efficiency of the first PEM electrolyzer system released by the company was 80%, the electricity consumption was less than 4.4 kWh/Nm3, and the system volume was only about 1/4 of the alkaline electrolyzer. Fuel cells and PEM electrolyzers react in reverse, and their materials and components are similar. We believe that with years of technical accumulation of fuel cells and components, Yihuatong has a certain technical advantage in entering the PEM electrolyzer industry. At the same time, China's green hydrogen industry is currently rapidly expanding and is expected to enjoy high downstream demand.

Expense ratio was well controlled during the period, and gross margin and net interest rate were stable. The company's 2Q23 sales/management/R&D/financial expense ratio was 17.0%/55.4%/30.4%/-0.2%, respectively, and the cost rate increased by 5.3 ppt/30.8 ppt/7.7 ppt/1.5 ppt, respectively. In terms of profitability, the company's 2Q23 gross margin fell 0.5ppt to 37.4% year on year. Due to the sharp decline in revenue and scale contraction, the company's net profit still maintained a loss.

Profit forecasting and valuation

We kept our net profit of -1.65 and -66 million yuan essentially unchanged for 2023 and 2024. The current stock price corresponds to 7.6 times 2023 and 4.4 times 2024 EV/S. It maintains outperforming industry ratings, but due to the decline in industry valuation centers, we lowered our target price by 35% to 65 yuan, corresponding to 9.7 times 2023 EV/S and 5.6 times 2024 EV/S. There is 20% room for increase from the current stock price.

risks

Hydrogen energy policies in various regions fell short of expectations, sales of fuel cell vehicles fell short of expectations, and industry competition intensified and profitability declined.