China Galaxy Securities Maintains "Recommended" Rating on Yinghe Technology

China Galaxy Securities has released a research report stating that it continues to maintain a "recommended" rating on Yinghe Technology (300457.SZ).

[Two Supremes News] Recently, China Galaxy Securities released a research report stating that it continues to maintain a "recommended" rating on Yinghe Technology (300457.SZ). 

The report mentions that Yinghe Technology disclosed its 2023 semi-annual report. In the first half of 2023, the company achieved operating revenue of 4.801 billion yuan, a year-on-year increase of 3.84%; achieved a net profit attributable to the parent company of 298 million yuan, a year-on-year increase of 12.81%; and achieved a net profit of 263 million yuan after deducting non-recurring gains and losses, a year-on-year increase of 0.54%. In Q2 alone, the company's revenue was 3.063 billion yuan, a year-on-year decrease of 0.24%, but a quarter-on-quarter increase of 76.28%; net profit was 195 million yuan, a year-on-year decrease of 2.34%, but a quarter-on-quarter increase of 89.26%.

The rating reasons mainly include the following factors:

Overall steady growth in performance in H1 2023, with overseas revenue accounting for over 30%.

The expansion of production capacity among domestic battery companies has slowed, and bidding demand has declined. In H1 2023, the company's revenue from lithium battery equipment was 3.259 billion yuan, a year-on-year decrease of 26.10%. Against the backdrop of rapid global development of new energy vehicles, overseas battery companies are accelerating expansion. The company has been deeply engaged in lithium battery equipment for over a decade, establishing in-depth cooperation with overseas clients such as Volkswagen, BMW, ACC, and LG Energy, leading to an increase in the proportion of overseas orders, with overseas revenue from lithium battery equipment exceeding 30% in the first half of the year.

Increased contribution from the highly profitable e-cigarette business, coupled with continuous optimization of operational management, significantly improving the company's profitability.

The e-cigarette business has a strong profitability, with gross margin and net margin reaching 40.91% and 29.11% respectively in the first half of 2023. The e-cigarette business accounted for nearly 30% of revenue in H1 2023, effectively boosting the company's profit levels. The overall gross margin for the company in H1 2023 was 26.65%, a year-on-year increase of 7.28 percentage points; net margin was 10.19%, a year-on-year increase of 4.41 percentage points. In Q2 alone, the gross margin was 28.20%, a year-on-year and quarter-on-quarter increase of 7.65 percentage points and 4.27 percentage points respectively; net margin was 10.94%, a year-on-year and quarter-on-quarter increase of 3.94 percentage points and 2.08 percentage points respectively; all showing improvement for three consecutive quarters. In terms of expenses, the sales expense ratio in H1 2023 was 2.29%, a year-on-year decrease of 0.08 percentage points; management expense ratio was 2.87%, a year-on-year increase of 0.46 percentage points; with continuous development in product technology, the R&D expense ratio was 6.83%, a year-on-year increase of 1.89 percentage points.

High market prosperity overseas, with SKE e-cigarette business rapidly expanding.

The global e-cigarette market is growing rapidly, with a year-on-year increase of 20% in 2022, among which disposable e-cigarettes have seen explosive growth and rapid increase in penetration. The United States, the United Kingdom, and Canada are the top three e-cigarette consuming countries globally. Since 2022, SKE has been vigorously developing its own brand business and has obtained TPD certification for new e-cigarette products in Europe.

In March of this year, SKE established a wholly-owned subsidiary, SKE E-CIGS UK LTD, in the UK, focusing on expanding the UK and European e-cigarette market. With product technology advantages and multi-channel development in supermarkets, SKE has rapidly risen in the UK market, with sales jumping from seventh place in January to fourth place in April this year.

On the other hand, China is a major exporter of e-cigarettes, with exports reaching 5.482 billion USD in the first half of 2023, a year-on-year increase of 29.16%. In July of this year, the National Tobacco Monopoly Bureau issued guidelines on promoting the construction of a quality assurance system for e-cigarette exports, further improving the quality management of e-cigarette exports and reducing operational risks for exporting companies. SKE has made breakthrough progress in expanding overseas markets, achieving revenue of 1.433 billion yuan in the first half of 2023, a year-on-year increase of 1477.33%; net profit reached 417 million yuan, already reaching 76% of last year's total. Benefiting from strong overseas market demand, SKE's performance is expected to maintain high growth momentum, and the highly profitable and cash-generating e-cigarette business will contribute performance elasticity to Yinghe Technology.

The report also mentioned risks:

Economic recovery not meeting expectations, new product development not meeting expectations, rapid iteration of core technologies, intensified market competition, fluctuations in raw material prices, and concentration of material suppliers.

References: 【1】 Significant improvement in profitability, explosive growth of e-cigarette business