2023 results are in line with our expectations
The company announced its 2023 results: revenue of US$1.37 billion, a year-on-year decrease of 30.9%, net profit to mother of US$0.4 billion, a year-on-year decrease of 126.6%, after deducting non-net profit of US$40 million, a year-on-year decrease of 124.2%.
On a semi-annual basis, 2H23's revenue was US$640 million, down 35.6% year on year, net profit to mother - US$90 million, down 213.7% year on year, after deducting non-net profit - US$90 million, down 210.9% year on year. The results were in line with the performance forecast.
Industry inventory removal affects the performance of power tools and OPE. In 2023, the company's power tool revenue was 550 million US dollars, -27.3% year over year, mainly due to slowing housing demand and the impact of industry inventory removal; OPE's business revenue was US$81 million, -33.7% year over year, mainly due to industry inventory removal and adverse weather effects in North America in the spring of 2023. In 2023, the company's comprehensive gross margin decreased by 2.2ppt to 28.1% year on year, with 23H2 gross margin falling 8.4ppt to 23.5% year on year, mainly affected by the impairment of lithium battery cells.
Expense rates increased during the period due to the decline in revenue. Expenses remained high during the 2023 period, resulting in sales, management, R&D, and finance expense ratios of +7.0/+2.5/+1.8/-0.9ppt to 17.8%/7.0%/5.1%/0.2% year over year. As of the end of 2023, the company's inventory was US$530 million. Due to a decrease in customer orders, the number of inventory turnover days slowed from 157 days last year to 209 days. Since the company's lithium batteries were high-priced products before the price reduction, the company prepared an inventory impairment of about US$45 million.
Development trends
The company's terminal sales are good, and the decline in revenue is clearly affected by channel dewarehousing. The company's public results conference stated that terminal sales of the company's products showed an increasing trend, and the decline in revenue was mainly due to changes in inventory policies for major customers.
On the profit side, in addition to maintaining a high level of expenses affecting profits, the company's lithium battery cell inventory is high, and depreciation also affects profit levels. Looking back, based on the company's lithium battery strategy, we think the battery will continue to lose value in 2024.
The inventory removal is expected to be completed in the 2nd quarter of 2024, and we are optimistic about OPE's structural growth in the medium to long term. We expect demand from the OPE industry to remain weak in the first half of 2024, and it is expected that the inventory removal will be completed in the 2nd quarter of 2024. Looking back, since demand for OPE is still weak, we still need to observe the advent of the stock replenishment cycle. We believe that in the medium to long term, we expect real estate restoration after the US cuts interest rates, thereby driving up demand for durable consumer goods. We are optimistic about Quanfeng's performance after industry demand recovers with the advantages of lithium-ion products.
Profit forecasting and valuation
We maintain the company's 2024/2025 EPS forecast of $0.06/0.25. The company's current stock price corresponds to 38.2x/9.0x P/E 2024/2025. We maintain our target price of HK$25, corresponding to 2024/2025 56x/13x P/E, with 45.7% upside. Maintain an outperforming industry rating.
risks
US interest rate cuts fell short of expectations; OPE commercialization promotion fell short of expectations.