Sungrow Power Supply Earnings: Favorable Geographical Mix Boosts Gross Margin

Sungrow’s third-quarter revenue is in line, but net income beat our expectation as gross margin expanded to 34.4%, up 9.2 percentage points year on year. Management attributed the strong gross margin to a higher proportion of overseas sales. We estimate overseas revenue accounted for 59% of total revenue in the third quarter compared with 53% during the same period last year. In addition, we believe lower inputs and shipping costs also helped. After raising our gross margin assumption to 29.4% from 27%, we increase our net income estimate to CNY 9.3 billion from CNY 8.8 billion for 2023, representing a 160% increase year on year. We maintain our assumptions for 2024 and beyond. We expect gross margin to contract to 25.1% in 2024 but net income should still grow by 22% year on year on higher shipments. We keep our fair value estimate at CNY 86. The shares closed 2% below our fair value estimate on Oct. 31. We suggest investors wait for better entry points.