Yuanli Co., Ltd. has been deeply involved in wood activated carbon for more than 20 years. It has relied on activated wood carbon and silicide to form a stable revenue base market, and has continued to create a second growth curve by laying out new energy materials such as supercapacitor carbon, hard carbon, and silicon carbon. The company's performance maintained a high growth rate in 2022. 2023Q1 is under pressure in the short term, and we are optimistic about growth throughout 2023. We are optimistic about the company's development prospects in the field of new energy carbon materials, which is expected to drive a double increase in the company's net revenue and profit. Adjust the company's 2023-2025 EPS forecast to 0.73/0.93/1.24 yuan (the original 2023-2024 EPS forecast was 0.89/1.08 yuan, 2025 is an additional forecast). Using the segmental valuation method, the company was given a target market value of 7.8 billion yuan in 2023 and a corresponding target price of 22 yuan to maintain the “buy” rating.

Results continued to grow at a high rate in 2022, and profitability improved. The company achieved revenue of 1,951 million yuan for the full year of 2022, YoY +21.3%; net profit of the mother was 224 million yuan, YoY +47.6%. In terms of business, the company achieved revenue of 1.20 billion yuan (YoY +14.4%) for wood activated carbon in 2022, gross profit of 29.47% (YoY +2.04pcts); sodium silicate achieved revenue of 533 million yuan (YoY +31.7%), gross profit margin of 9.52% (YoY -1.59 pcts); silicone achieved revenue of 202 million yuan (YoY +48.5%) and gross profit margin of 30.81% (YoY +3.58pcts). Benefiting from increased gross margin of businesses such as activated carbon and silicone, the company's overall gross margin in 2022 was 24.19% (YoY +0.72pcts).

The 2023Q1 performance is under pressure in the short term, and we are optimistic about full-year growth. 2023Q1 achieved revenue of 457 million yuan, YoY -6.7%; net profit of the mother was 45 million yuan, YoY -10.9%. Mainly downstream customers stocked more raw materials during the pandemic. From January to January 2023, they mainly consumed inventory during the epidemic, which led to a temporary decline in demand for activated carbon. At the same time, upstream bamboo and wood processing companies have not started enough construction since 202Q4, leading to a short-term increase in procurement costs for activated carbon raw materials such as bamboo and wood chips. These short-term disruptors are expected to gradually end after the second quarter of 2023, and the company's performance is expected to resume growth.

Strengthen the leading position of wood activated carbon and expand product application areas. By the end of 2022, the company's wood activated carbon production capacity had exceeded 120,000 tons, its market share stabilized at over 30%, and its leading edge continued to expand. In addition to traditional application fields such as food and beverages, the company continues to explore the application fields of activated wood carbon, including steadily laying out the pharmaceutical activated carbon market and vigorously expanding its application in the field of gas phase adsorption. By promoting the expansion of bamboo-based granular carbon production capacity, the company is expected to gradually replace coal-based activated carbon in the environmental protection field dominated by coal-based activated carbon, and enjoy the high growth rate of the environmentally friendly activated carbon industry.

The industrialization of sodium electricity is accelerating, and we are optimistic about long-term development prospects. Recently, the industrialization of sodium power in China has continued to accelerate: in February 2023, the industry's first sodium battery test vehicle jointly built by Zhongke Sea Sodium and JAC Sihao New Energy was unveiled; in March, Yadi and its subsidiary Huayu New Energy jointly released Yadi Huayu's first-generation sodium-ion battery “Extreme Sodium S9” and the first electric two-wheeler equipped with a sodium battery “Extreme Sodium S9”; in April, Ningde Shidai stated on the night of the Chery iCar brand that it is working hard to promote the industrialization of sodium batteries this year and will launch the Ruiqi model. According to EVTank's forecast, by the end of 2023, the production capacity of China's dedicated sodium battery mass production line will expand from 2 GWh in 2022 to 13.5 GWh; China's sodium battery shipments will rise from 3 GWh in 2023 to 45.4 GWh in 2026, and CAGR will reach 147%.

Promote the industrialization of new energy carbon materials such as supercapacitor carbon, hard carbon, and silicon carbon anodes to create the company's second growth curve. In January 2023, Yuanli New Energy Carbon Materials (Nanping) Co., Ltd., a wholly-owned subsidiary of the company, was established.

Using industry, education, and research accumulation in fields related to carbon materials, the company is accelerating the establishment of an advantageous position for the application of the company's carbon materials in the field of new energy. Currently, the company's supercapacitor carbon, hard carbon, and silicon-carbon anode materials projects are progressing in an orderly manner, and it is expected that they will continue to benefit from the industrialization of sodium batteries and the increase in energy density of lithium batteries. 2023 is expected to be the first year of the launch of the company's new energy carbon material products, forming a new performance growth point.

Build the four major industrial cycles of bamboo, carbon, silicon, and energy, and continue to reduce costs and increase efficiency through green development. Using the construction of a recycling industrial park as a starting point, the company effectively connects business segments such as activated carbon, sodium silicate, silica gel, and clean energy through the recycling of materials and heat, which is expected to continue to reduce costs and increase efficiency. Furthermore, the company has deepened cooperation with Yihai Kerry Arowana and is committed to promoting the healthy development of water glass and activated carbon for rice husk and rice husk ash production. Construction work has already been carried out on related projects in Panjin, Liaoning, and has achieved a strategic layout for new raw materials such as rice husk, which is conducive to continuously strengthening the company's long-term competitiveness.

Risk factors: risk of macroeconomic operation; risk of increased market competition; risk of progress in the implementation of corporate fund-raising projects; risk of fluctuations in raw material prices; risk of exchange rate fluctuations.

Investment suggestion: Yuanli Co., Ltd. has been deeply involved in wood activated carbon for more than 20 years. It has relied on activated wood carbon and silicide to form a stable revenue base market, and continues to build a second growth curve by laying out new energy materials such as supercapacitor carbon, hard carbon, and silicon carbon. On the one hand, the company's wood activated carbon relies on rigid demand in traditional fields such as food and beverages. On the other hand, it promotes the gradual replacement of coal-based activated carbon in the environmental protection field dominated by coal-based activated carbon, and enjoys the high growth rate of the environmentally friendly activated carbon industry. We are optimistic about the company's development prospects in the field of new energy carbon materials, which is expected to drive a double increase in the company's net revenue and profit. The company continues to reduce costs and increase efficiency through large-scale advantages and green recycling production methods to strengthen its leading position. Considering the short-term decline in the company's revenue caused by downstream customers digesting inventory in 2023Q1, and the decline in the company's gross margin due to upstream raw material prices still being high, and the significant increase in share capital brought about by the company's convertible debt-to-equity conversion in 2022, we adjusted the company's 2023-2025 EPS forecast to 0.73/0.93/1.24 yuan respectively (the original forecast value of EPS for 2023-2024 was 0.89/1.08 yuan, and 2025 is the new forecast).

After 2023, the company's main business will be divided into traditional business (activated carbon, silicide) and new energy materials business (supercapacitor carbon, hard carbon, silicon carbon), which is suitable for valuation using the segmented valuation method: (1) For traditional business, we forecast net profit attributable to the mother in 2023 to be 250 million yuan; the average PE (Wind unanimous forecast) value of comparable companies (Jin Sanjiang, Xinri Hengli) in 2023 is 16X. We gave the company's traditional business PE16X in 2023, corresponding to a market value of about 4 billion yuan. (2) For the new energy materials business (supercapacitor carbon, hard carbon, silicon carbon, etc.), this field is still in the early stages of industrialization, but the trend of industrialization is clear. We used the market sales rate valuation method for valuation. Referring to comparable companies such as Puterai, Zhongke Electric, and Xiang Fenghua, the average PS (TTM) values since 2019 were 9X, 7X, 7X, respectively; in 2021, when the penetration rate of new energy vehicles rose rapidly, their average PS (TTM) values were 13X, 11X, 9X, considering that the company's hard carbon was, respectively; considering that the company had hard carbon, etc. Fields such as silicon carbon and supercapacitor carbon have technical advantages, and are expected to be 2025 The annual revenue of the company's new energy materials business is 555 million yuan. If a market sales rate of 8X is carefully given, the corresponding market value of this part of the business is expected to reach 4.44 billion yuan in 2025. If a prudent discount rate of 8.3% (WACC is 8.29%), the corresponding market value in 2023 is 3.8 billion yuan. In summary, the company was given a target market value of 7.8 billion yuan in 2023, corresponding to the target price of 22 yuan in 2023, maintaining the “buy” rating.