Incident: The company released its 2022 annual report. In 2022, the company achieved total revenue of 3,947 billion yuan, a year-on-year decrease of 19.75%; net profit returned to the mother was 211 million yuan, a year-on-year decrease of 22.46%.

Q4 revenue declined significantly under multiple pressures, and the market share of adjuvants continued to increase. The revenue of 2022Q1-4 companies was -0.92%/-18.90%/-18.22%/-34.43%, respectively, and 22Q4 revenue declined a lot.

Market demand was weak in 2022 due to the slump in the real estate boom and the turmoil of the epidemic, but the company achieved a continuous increase in the market share of the adjuvants business. In 2022, the company's new additive materials business achieved revenue of 2,519 billion yuan, a year-on-year decrease of 17.88%. In 2022, the company sold 1.38 million tons of admixtures, down 16.87% year on year, market share 9.8%, and an increase of 0.3 pct over the previous year. The company's comprehensive technical service business achieved revenue of 469 million yuan in 2022, a year-on-year decline of 8.53%.

The decline in costs and the improvement in gross margin affected 22-year results after accounting for impairment of goodwill. In 2022, the gross profit margin of the company's additive new materials business was 22.44%, up 3.49 percentage points from the previous year. Among them, the average price of a single ton of additive was 1,825 yuan/ton, down 1.22% from the previous year, the net profit per ton was 121 yuan/ton, an increase of 26.34% over the previous year; the gross profit margin of the technical service business was 33.57%, an increase of 2.26 percentage points over the previous year. In terms of period expense ratio, in 2022, the company's sales expense ratio was +0.66 pct year on year; the management expense ratio was +0.7 pct year on year; the R&D expense ratio was +0.94 pct; and the financial expense ratio was +0.23pct year on year, mainly due to a decrease in cost dilution during the period when the company's sales scale declined. The company's asset impairment loss in 2022 was 50.64 million yuan, mainly due to the company's preparations to calculate goodwill impairment for Leizhi Technology and its subsidiaries in '22.

Operating cash flow improved year over year, and the pay-to-cash ratio increased. The company's net cash flow from operating activities in 2022 was 420 million yuan, an increase of 30.60% over the previous year, mainly due to the year-on-year increase in the company's sales payback in 2022. 1) Payout ratio: The company's payout ratio in 2022 was 105.32%, a year-on-year change of +23.74pct; the company's accounts receivable and notes receivable balance at the end of 2022 was $3.398 billion, down 4.84% year on year; 2) Payout ratio: The company's payout ratio in 2022 was 97.19%, a year-on-year change of +25.16pct; the company's accounts payable and notes payable balance at the end of 2022 was 1,950 billion yuan, a year-on-year decrease of 20.28%.

Profit forecasting and investment ratings: The additive business has benefited from increased customer concentration and the accelerated exit of small enterprises. The company's share has increased and sales have grown rapidly. At the same time, the increase in added value brought about by technical service attributes has gradually become apparent; the “cross-regional and cross-field” strategy of the testing business promotes the accelerated implementation of epitaxial mergers and acquisitions, improving performance while further enhancing the ability to build comprehensive technical services. Subsequent regional expansion is worth looking forward to. Considering the company's potential for cross-regional and cross-sector expansion, we adjusted the company's net profit of 2023-2025 to 412/495/587 million yuan (previous value of 405/488 million yuan before 23-24). The current market capitalization corresponding to the 2023-2025 PE was 11X/10X/8X respectively, maintaining the “increase in holdings” rating.

Risk warning: Downstream infrastructure and real estate industry fluctuation risk, raw material price fluctuation risk, industry competition risk, accounts receivable risk, etc.