3Q23 performance is in line with our expectations

The company announced 1-3Q23 results: revenue of 7.5 billion yuan, up 13.4% year on year; net profit of 510 million yuan, up 44.7% year on year, in line with our expectations. Looking at a single quarter, 3Q23 revenue was 2.70 billion yuan, up 35.5% year on year, and net profit was 210 million yuan, up 139.9% year on year.

Increased gross profit margin and net interest rate. 1-3Q23/3Q23 The company's comprehensive gross margin was 28.7%/32.4%, up 9.2ppt/12.5ppt from the previous year. We believe that changes in business structure are mainly driving up gross margin. The company's expenses for the period 1-3Q23/3Q23 were 12.0%/12.1%, an increase of 1.7ppt/1.0ppt over the previous year. Specifically, the 3Q23 sales/management/R&D/financial expenses rate remained flat year-on-year /+0.1ppt/ +1.7ppt/, respectively.

1-3Q23/3Q23 The company's net interest rate was 6.8%/7.9%, an increase of 1.5ppt/3.4ppt over the same period last year.

Improved cash flow. The net inflow of 1-3Q23 operating cash flow was 570 million yuan, an increase of 860 million yuan over the same period last year.

As of the end of 3Q23, the balance of accounts receivable was 6.17 billion yuan, an increase of 1.86 billion yuan; contract liabilities were 2.01 billion yuan, an increase of 1.04 billion yuan over the previous year, an increase of 72.54 million yuan over the previous year.

Development trends

The expansion of domestic lithium power plant production has slowed in the short term, and the overseas growth rate is expected to rise. According to the China Automobile Association and the China Automobile Power Battery Industry Innovation Alliance, the cumulative sales volume of 1-3Q23 new energy vehicles in China was 6.278 million units, an increase of 37.5% over the previous year, and the cumulative load capacity of power batteries was 255.7 GWh, an increase of 32.0% over the previous year. The short-term expansion of domestic lithium power plants has slowed. Looking at overseas markets, domestic battery manufacturers are expanding overseas production and battery manufacturers are expanding production at an accelerated pace in recent years. According to announcements from downstream manufacturers, the Ningde Era, Volkswagen, etc. all have plans to build production capacity overseas. Considering that the company has a first-mover advantage in overseas markets, we believe that as overseas lithium battery manufacturers expand production and sentiment rises, the company's overseas lithium battery business is expected to benefit from growth.

Follow the progress of the e-cigarette business. Scoll, a subsidiary of the company, is engaged in the e-cigarette business, mainly in the brand business, providing products such as e-cigarettes, smoke, atomizers and other e-cigarette accessories. 1H23's e-cigarette business revenue was 1.43 billion yuan, accounting for about 30% of revenue. We estimate that the e-cigarette business still accounted for about 30% of the revenue in the first three quarters, contributing to the growth of the company's revenue; at the same time, the e-cigarette business had a higher profit situation, supporting the company's profit growth (1H23 e-cigarette gross margin was 41%). Since this year, Skoll has achieved breakthrough development in market development in the UK, Germany and other European countries. It has a competitive advantage in terms of products, technology, and channel resources. We recommend paying attention to the subsequent growth of the company's e-cigarette business.

Profit forecasting and valuation

Considering the slowdown in production expansion by domestic battery manufacturers, the 2023e profit forecast was lowered by 7% to 700 million yuan, and the 2024e profit forecast was maintained. Currently trading at 18x/17x 2023e/2024e P/E, maintaining the target price of 21.00 yuan, corresponding to 19x/19x 2023e/2024e P/E, 6% upward space. Maintain a neutral rating.

risks

The expansion of production by downstream manufacturers fell short of expectations, and competition in overseas markets intensified.