Incident: On March 27, Sanripu released its 2022 annual report. The company achieved revenue of 2.174 billion yuan in 2022, a decrease of 5.66% over the previous year; achieved net profit of 206 million yuan, a decrease of 38.84% over the previous year; and achieved net profit of 169 million yuan after deducting non-return mother's net profit, a decrease of 44.54% over the previous year.

Affected by global inflation and rising production lines, etc., the company's performance is under pressure in the short term. In 4Q22, the company achieved business of 512 million yuan in a single quarter, a year-on-year decrease of 5.22% and a decrease of 10.23% from the previous quarter; it achieved net profit of 19 million yuan, a year-on-year decrease of 67.44% and a decrease of 61.30% from the previous quarter. Looking at the profit level, the gross margin in '22 was 21.42%, down 3.57 pct from the previous year; the net interest rate was 9.77%, down 5.58pct from the previous year, of which the 4Q22 gross margin was 20.27%, an increase of 0.07 pct over the previous month; the net interest rate was 3.79%, a decrease of 5.00 pct over the previous month. We think it was mainly due to the decline in market demand and the commissioning of the Longgang production line. At the same time, the company's imported material costs and exchange losses increased due to the devaluation of the RMB.

Production expansion continues, and new car+VR products help growth. The company has four major production bases: Shenzhen Guangming, Shenzhen Longgang, Anhui Hefei, and Fujian Putian. In the long run, localization of polarizers is an inevitable trend, and sufficient production capacity is a prerequisite for domestic substitution. The company's new projects, such as Putian and Hefei Phase II, are progressing smoothly. The Putian 1490mm Vehicle Polarizer Line 7 (production capacity 6 million square meters/year) project was completed and entered the trial production stage. It is expected that the capacity utilization rate will increase in an orderly manner in 2023; the Hefei Phase II ultra-wide polarizer production line (estimated capacity planning of 30 million square meters/year) has entered the civil construction phase, which is expected to be completed and put into operation by the end of 2023.

With the completion of the climbing of Longgang Line 6 in the future, the Putian No. 7 vehicle line and the Hefei Phase II TV production line are put into operation one after another, we expect the company's production capacity to reach about 40 million square meters in '23, and the total production capacity of the company will reach more than 70 million square meters by the end of '24. In addition to traditional business, the company promotes the development of many innovative products such as automotive iodine polarizers, flexible AMOLED polarizers, ultra-high transmittance LCD polarizers, LCD polarizers with a combined thickness of 150um, 9 micron ultra-thin PVA polarizers, and polarizers for folding optical paths in VR headsets. It continues to ship to major customers and continues to verify downstream, which is expected to become a new profit growth point.

Domestic substitution is being accelerated, and material costs are expected to be reduced in the future. Materials account for a relatively large share of the company's production costs. In '22, the direct material cost of polarizers accounted for 69%. The company's core raw material, PVA film, was mainly purchased from Japan's Kuraray, and TAC film was mainly purchased from Fujifilm. Although current demand can be met, the company has set up a “localization of raw materials” team to increase the progress of domestic raw materials import projects to reduce the proportion of raw materials purchased from Japan. It has imported suppliers of key materials such as Changchun Chemical, Anhui Wei Hi-Tech, and China's Lekai Group. In the long run, it will help reduce the company's material costs, and profitability continues to improve.

Investment suggestions: We are optimistic that the company's Longgang Line 6 climbing slope, the Putian No. 7 car line and the Hefei Phase II TV production line will contribute to production capacity. At the same time, adding new products such as automotive and VR Pancake and flexible AMOLED, the company can expect long-term growth. It is expected that the company will achieve revenue of 31.90/39.42/5.474 billion yuan in 23-25, and Guimu's net profit of 345/501/659 million yuan. Corresponding to PE 24/16/13 times PE, the company's domestic polarizers are scarce, and the downstream sector continues to expand. It has a strong competitive advantage and maintains a “recommended” rating.

Risk warning: downstream demand falls short of expectations, production lines fall short of expectations, and prices of upstream raw materials rise.