Main points of investment:

Event: on September 5, 2022, the company announced that the board of directors examined and approved the proposal of the subsidiary Chengdu Fangda carbon Composites Co., Ltd. (referred to as Chengdu carbon) to be listed on the new third board. Chengdu carbon material is mainly engaged in R & D, production and sales of isostatic pressed graphite, which is a high-end product of graphite industry and an important material in the cutting-edge fields such as thermal field material of monocrystalline silicon drawing furnace and nuclear reactor deceleration material in photovoltaic and semiconductor industry. According to the company announcement, Chengdu carbon has been selected into the third batch of the Ministry of Industry and Information Technology specializing in the new "Little Giant" enterprise list.

Isostatic graphite downstream demand rise + domestic alternatives to accelerate the expansion of space, the "Little Giant" is expected to fully benefit. Isostatic pressed graphite is an important part of the thermal field material of monocrystalline silicon drawing furnace. due to the increase of photovoltaic installed capacity and the promotion of the localization of semiconductor industry chain, the market space of isostatic pressed graphite is expected to grow. On the other hand, the self-sufficiency rate of isostatic pressed graphite in China is low, with self-sufficiency rates of 35.2% and 36% respectively from 2019 to 2020. As one of the core materials of monocrystalline silicon drawing furnaces, the future development of the industrial chain should achieve sufficient independent and controllable space. Chengdu carbon material, a subsidiary, has been selected into the list of enterprises specializing in the new "Little Giant" and is expected to fully benefit from the expansion of the isostatic graphite market.

It is optimistic about the rising trend of graphite electrode price under the background of carbon neutralization. Both ends of the supply and demand of graphite electrodes benefit from carbon neutralization, and the supply side:

The carbon emission per ton of graphite electrode reaches 4.48 tons, which may limit the future expansion under the background of double high. on the other hand, the anode material of lithium battery has strong profitability and will absorb part of the capacity of graphitization process of graphite electrode. Demand side: the carbon emission of electric furnace steel is 70% lower than that of blast furnace steelmaking. in 2019, electric furnace steel accounted for 10.4% of full-caliber steel output in China, which is far lower than the overall global level of 27.9%. According to the guidance for the high-quality development of the iron and steel industry of the Ministry of Industry and Information Technology, it is planned to increase the proportion of electric furnace steel to crude steel output to 15% and 20% in 2025. On the other hand, China's scrap output has ushered in a period of rapid growth, the impact of the scrap recycling industry chain is expected to be alleviated by the epidemic, and the decline of scrap prices improves the performance-to-price ratio of EAF steel. In addition, the increase of industrial silicon production brought about by the demand for photovoltaic installation is also the main driving force for the growth of graphite electrode demand in the future.

Maintain the buy rating. 2022H1 Changfeng Fang 50,000 tons of graphite electrode production capacity completed, Meishan Rongguang 50,000 tons of graphite electrode production capacity, the company's graphite electrode production is expected to increase in the second half of the year, we expect the company's 2022-2024 graphite electrode production of 220000 tons, 260000 tons, 320000 tons, graphite electrode tax-free sales price of 21,000 yuan / ton, 27000 yuan / ton, 310,000 yuan / ton. Considering that the current scrap recycling industry chain is impacted by the epidemic, the scrap price remains high, the lower-than-expected decline in the cost of electric furnace steel slows the increase in the proportion of electric furnace steel, on the other hand, the weakening real estate demand leads to the overall weakness of steel demand. The delayed trend of tight supply and demand of graphite electrodes leads to a slowdown in the upward trend of prices, lowering the profit forecast for 2022-2023 and adding the profit forecast for 2024. It is estimated that the net profit from 2022 to 2024 is 1.24 billion yuan, 2.21 billion yuan and 3.4 billion yuan respectively (the original forecast from 2022 to 2023 is 2.28 billion yuan and 3.8 billion yuan respectively), and the corresponding PE is 20 times, 11 times and 7 times respectively. In the context of carbon neutralization, the rise in graphite electrode prices will not change the long-term trend in the short term. In the future, the rise in graphite electrode prices plus the company's new production capacity is expected to lead to rapid profit growth. The company's PEG from 2022 to 2024 is expected to be 0.43,0.24,0.16 respectively, significantly lower than 1, maintaining the buy rating.

Risk hints: steel carbon neutralization process deceleration risk, resulting in a slow increase in the proportion of electric furnace steel; power constraints lead to a decline in electric furnace steel production in the future; the future new supply is higher than expected.