Enjie Corporation: Battery chain "clear current" quickly slides towards "mediocrity"

On the evening of March 2nd, 2023, Enjie Holdings Co., Ltd. (SHE:000803) announced its performance report for the full year of 2022. Here is a simple analysis by Dolphin:

(1) The company's net profit attributable to shareholders fell 20% year-on-year in the fourth quarter of 2022, dropping from a positive growth rate of 70% in the previous quarter, even though the company had already announced that the fourth quarter performance would be weak in its full-year profit forecast at the end of January. The actual profit was almost close to the lower limit of the forecast.

(2) The profit decline was mainly due to a decrease in revenue. The fourth-quarter revenue was only CNY 3.3 billion, lower than the market expectation of over CNY 4 billion as guided by the company before. The year-on-year growth rate of revenue fell sharply to 25%, compared to nearly 80% in the third quarter.

(3) If the sales volume is affected by the COVID-19 pandemic, then the decline in gross profit margin is obviously related to the competition or the company's position in the industry chain. The company mentioned that it offered discounts on coating films to certain customers, resulting in a gross profit margin of less than 43% in the fourth quarter, which is significantly lower than the 50% gross profit margin in previous quarters. Taking into account the data for the whole year, manufacturing costs, energy and personnel costs pushed down the gross profit margin. Meanwhile, the progress of the high gross margin market expansion abroad was significantly lower than expected.

(4) Short-term performance is likely to remain weak. The first quarter is a low season for sales. The company had equipment maintenance in February, and sales only picked up in March. Overall sales volume in the first quarter remained flat year-on-year, and the revenue growth can only rely on the price increase of coating films. However, improving the unit price of coating films may not necessarily lead to an improvement in the gross profit margin. Therefore, there is no hope for revenue in the first quarter.

Dolphin's overall opinion:

In November last year, Enjie's management was unexpectedly placed under home surveillance. Although in the announcement of the annual performance forecast on January 30, the company explained that the surveillance had been lifted, this incident still undermined the market's trust in the company.

The problems arising in terms of year-on-year performance and management in the fourth quarter were also evident, with revenue, gross profit margin and profit dropping suddenly. This has really cast doubt on the credibility of the company's performance. The slump in gross profit margin is too severe.

In the last quarter’s earnings season, Dolphin suggested that Enjie’s performance is worth paying attention to but buying at too early a stage is not recommended, because the competition prospect changed unfavorably. The fourth quarter performance explains the reasons behind the statement.

At present, Enjie's valuation has fallen to around 25 times P/E, but Dolphin's short-term judgment is still cautious, especially with the release of the same industry's capacity afterward, which may affect its profitability. We will continue to observe. This article is an original article by Dolphin Research and Investment. Unauthorized reproduction is prohibited. Users who are interested are recommended to add the WeChat account "dolphinR123" to join the Dolphin Research and Investment Circle and learn from each other about global asset investment perspectives!

The following are detailed points:

1. Is Enjie's Manufacturing Industry Now "Mediocre"?

Originally, as a global leader in wet process diaphragms, Enjie's advantages were its unique equipment supply and the relative advantages in production capacity brought by its early layout. In terms of revenue, it reflected high growth and high gross profit. But by the fourth quarter of 2022, this situation seems to have completely changed.

Enjie's fourth-quarter revenue slowed down rapidly, reaching 3.3 billion yuan, an increase of only 25% year-on-year, compared to 78% in the previous quarter; traditionally, each fourth quarter is the peak season for shipments, and the quarter-on-quarter increase should be high, but this year's fourth quarter has become a decline.

It should be noted that the company previously revealed that monthly production was 500 million square meters, and full production and sales in the fourth quarter should be 1.5 billion square meters, which represents a quarter-on-quarter growth of 25%. Even if the unit price remains unchanged, the quarter-on-quarter revenue should still be positive, but it fell far short of market expectations.

Enjie's explanation is that the epidemic in the fourth quarter affected the production of batteries, which in turn affected the shipment of diaphragms, resulting in a decrease in quarter-on-quarter shipments; but there is also a very obvious factor that should be the downward trend of diaphragm prices, and whether it is the impact of rumors such as Ningde Times' joint procurement or the downward pressure on prices caused by the easing of supply issues and increased competition, it has a significant impact on the logic of investing in Enjie.

During the same period, net profit attributable to shareholders was 770 million yuan, while according to the annual net profit forecast, the company's net profit attributable to shareholders was expected to be between 670 million yuan and 1.07 billion yuan in the fourth quarter. The actual result is still tied to the lower limit of the disappointing guidance.

2. Rapidly Declining Gross Margin: Competition and Epidemic Have an Impact

This quarter's revenue and gross margin are both lagging behind. The gross margin of the company has rapidly declined by 6 percentage points to less than 43%. It should be noted that as a high-gross-margin small and fresh company in the manufacturing industry, the gross margin of this company was more than 50% during the period of supply shortage.

The original expected development path was that the coating product had a high price and low gross margin, which could increase the gross profit amount, while the high unit price and high gross profit of overseas markets could ultimately drive the company's overall revenue and gross profit upwards.

However, in the fourth quarter, due to the release of industry capacity and the strong bargaining power of major customers, the company's coating products were sold at a price a few points below the market price for specific customers and specific products, resulting in a direct linear decline in gross profit margin. This part of the reason is obviously related to competition.

As for the progress in overseas markets, the contribution of overseas markets in the second half of 2022 did not increase, especially the company's previous hope that the overseas contribution ratio could reach 30% by the end of 2022 did not materialize. Although the gross profit margin of overseas markets has rebounded slightly to 54%, the lack of revenue growth has prevented it from compensating for the decline in the profit margin of the domestic market.

From the change in the cost structure of membrane products throughout the year, it can be seen that the proportion of raw material costs, with polyethylene as the core, is indeed decreasing as the price of crude oil declines relative to income. However, the cost rate of manufacturing costs, energy power, and labor costs is increasing, indicating that the growth of energy prices and labor costs is too fast and there are some problems with capacity utilization.

Especially the manufacturing cost rate has risen rapidly, which should be related to capacity utilization and shipments. Indeed, the impact of the epidemic in the fourth quarter needs to be considered, but the concession of coated film has also pushed up the manufacturing cost rate. In terms of energy, the company's explanation is that in the fourth quarter, winter prices were implemented for natural gas and electricity, and the month-on-month increase was relatively large.

R&D expenses skyrocketed and financial expenses surged.

As a B2B company, Enjie's big customers are highly concentrated, and the company basically does not need sales expenses. The key is the driving force of R&D for growth. Recently, the company's revenue has grown rapidly, and the operating leverage has been released very clearly.

However, there was a big change in the fourth quarter of the year, and the company suddenly increased a large amount of R&D expenses, resulting in an almost doubled R&D expense rate of 8.9%.

At the same time, the financial expenses also increased significantly in this quarter, causing the increase in the financial expense rate to be very obvious. The company explained that this was due to the increased bank loans.

Even if we do not consider the impact of the structure of funding sources and uses such as financial expenses, the core operating profit calculated by Dolphin is only 1 billion yuan, a year-on-year decrease of 14%, and the profit margin is only 31%, which is nearly 10 percentage points lower than the previous quarter.

Looking at the annual data again, we know that membrane products contribute about 88% of revenue and close to 95% of profit. Among them, traditional cigarette film and plain film in membrane products are both industries that have long been familiar with absolute values and growth rates. The core of membrane products is still Enjie's wet-process diaphragm. **

And the operating entity of wet-process diaphragm is Shanghai Enjie. According to the rough estimation of Dolphin Jun, assuming that the output of wet-process diaphragm of Enjie shares is 4.5 billion square meters in 2022, it can be seen that although the net price per unit area did not increase in 2022 despite the significant increase in the comprehensive average price due to the increase in the proportion of coating film, the net profit per unit area was 0.86 yuan, leading to a significant decline in net profit margin.

IV. Lying flat in the fourth quarter, what about this year?

From the industry trend of 2022, Enjie as the industry leader's shipment growth rate is actually behind the industry. Mainly because Enjie does not have the production capacity of dry-process diaphragm and did not fully enjoy the demand for diaphragm brought by the explosive growth of energy storage.

In terms of dry-process diaphragm, the production capacity layout is weak. The dry-process diaphragm production base jointly owned by the company and Celgard has finally been completed, and the first production line has been installed and is just beginning to be debugged. By the end of the year, the production capacity construction of 1 billion square meters will be completed. In addition, the dry-process factory jointly built with Ning Wang plans to have a production capacity of 2 billion square meters, which is specially supplied to Ning Wang.

Wet-process production capacity preparation: From the annual target of 2023, the company plans to increase another 3 billion on the existing production capacity of 7 billion square meters by the end of the year, reaching nearly 10 billion square meters. The corresponding shipment capacity should be 6.5-7 billion square meters. Based on Enjie's description of the shipment volume in 2022, Dolphin Jun estimates that it should be around 4.5 billion square meters. The growth potential is still not low, but the year-on-year growth was zero in the first quarter, and the realization degree of the shipment capacity for the whole year needs to be further observed.

Online coating: Among the 70 million square meters diaphragm production capacity at the end of 2022, the online coating capacity is 1.5 billion square meters. By the end of 2023, there will be about 55 online coating lines, and the contribution of the overall coating film shipment volume in 2023 should reach 50%, with half from online coating and half from offline coating.

Overall, although the shipment volume in the fourth quarter decreased month-on-month, the shipment volume guidance for the whole year of 2023 has not changed. However, in the short term, the first quarter should be relatively weak. The first quarter is originally the off-season, and the annual maintenance and maintenance work of the equipment will begin in February. The market in March is still in a state of recovery, and the shipment volume in the first quarter is estimated to be basically the same as that in the first quarter of 2022.

Historical articles of Changqiao Dolphin Jun Enjie Co., Ltd. (002812.SZ):

On October 27, 2022, financial report review "NIO: Can't Stay Fresh Anymore" was released.

On October 27, 2022, the minutes of the financial report meeting "Enjie Conference Call Minutes: "Ningde has not carried out centralized procurement of diaphragms at present"" were released.

On August 31, 2022, the financial report review "The Unique Freshness of the Battery Chain: Enjie's Faith can be Different" was released.

On September 2, 2022, the meeting minutes "Global market share will reach 50% by 2025" were released.

On April 12, 2022, the financial report review "Enjie Shares: The 'Dual King' with Growth and Profit, More Fragrant After Heavy Plunge?" was released.

On April 12, 2022, the meeting minutes "With Equipment and Process Barriers, Enjie's Position is Stable (Performance Presentation Minutes)" were released.

On December 29, 2021, the company's depth report "Enjie Shares: The New Energy Bubble has Burst, Will Cost-Performance Come Next? " was released.

On October 18, 2021, the industry depth report "Battery Materials (Part 2): How to Choose The Short-Distance Running Champion with Supply Shortage? " was released.

On September 23, 2021, the industry depth report "Battery Materials (Part 1): With the Pattern Opened, How to Choose The Long-Distance Running King?" was released. Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure