Recently, the company released its annual report for 2022 and the report for the first quarter of 2023. In 2022, the company achieved operating income of 3.670 billion yuan, an increase of 2.50% over the previous year, achieved net profit of -91 million yuan, an increase of 29.23% over the previous year, achieved net profit of -32 million yuan after deduction, an increase of 76.89% over the previous year, and net cash flow from operating activities was 329 million yuan, an increase of 94.51% over the previous year. In the first quarter of 2023, the company achieved operating income of 741 million yuan, a year-on-year decrease of 20.87%, a year-on-year net profit of 102 million yuan, an increase of 124.65% over the previous year, and achieved net profit of 1,74428 million yuan after deduction, an increase of 102.77% over the previous year. The net cash flow from operating activities was 41 million yuan, an increase of 754.32% over the previous year.

In terms of profitability, the company's gross sales margin in 2022 was 8.47%, down 0.41 pct from the previous year, the net sales margin was -2.36%, up 1.35 pct year on year. The company's gross sales margin for the first quarter of 2023 was 13.07%, up 3.63 pct year on year, and net sales margin was 1.63%, up 6.86 pct year on year.

By product, in 2022, viscose filament achieved revenue of 2,586 million yuan, an increase of 17.26% over the previous year, and its gross margin was 13.53%, an increase of 1,52 pct over the previous year; the revenue of viscose staple fiber was 595 million yuan, a decrease of 50.30% year on year, its gross margin was -5.81%, a year-on-year decrease of 7.42 pct. The revenue of carbon fiber products was 127 million yuan, with a gross margin of 2.25%, of production of 1,118 tons and sales volume of 805 tons. At the beginning of 2023, the front-end carbonization line for the company's 12,000-ton carbon fiber composite project was put into production. The composite production line is being installed in an orderly manner. The sales direction of the final product, pultruded board, is mainly in the field of wind turbine blades; in the long run, the company is optimistic about the future capacity utilization rate of carbon fiber. In addition, its wholly-owned subsidiary, Kamek's small wire bundle carbon fiber has been fully produced, and Jilin Kamek's small wire bundle carbon fiber achieved revenue of 127 million yuan.

Demand for carbon fiber in the wind power sector may open up more room for growth. The global carbon fiber industry market continued to grow in 2022. China's total demand was around 74,000 tons, an increase of about 20% over the previous year, accounting for more than half of the world's share. In the future, in the context of the “double carbon” target, China is accelerating the “green” energy transformation process. As the carbon fiber industry chain matures and costs fall, potential market space and application scenarios are endless. Wind turbine blades are currently the largest domestic carbon fiber demand market. The efficient, low-cost, high-quality carbon fiber pultruded beam process will greatly reduce the cost of using carbon fiber. In terms of blade size, in order to improve fan efficiency and meet a wider range of wind field conditions, the industry has now reached a consensus: the expansion of wind turbine diameter is the future development trend of wind power. As the length of the blade gradually increases, higher requirements are placed on the quality control of the blade. Glass fiber blades, which are traditional blade manufacturing materials, weigh a lot and are no longer able to meet the development trend of larger wind turbine blades. However, carbon fiber composites have lower density and higher strength than glass fiber composites, which can ensure that wind turbine blades increase their length while greatly reducing blade weight. Therefore, the application of carbon fiber materials to wind turbine blades has many irreplaceable advantages. We believe that at that time, other wind turbine blade manufacturers will launch wind turbine blade products using carbon beams, which will contribute greatly to the incremental market for carbon fiber in the wind power field.

Hengqiang is a strong player in the viscose filament industry. After years of development, the company's main product, viscose filament, has grown into the world's largest manufacturer of viscose filament with outstanding technical and quality advantages, with obvious competitive advantages in the industry. In recent years, the total global production capacity of viscose filaments has been between 25-280,000 tons, of which China's production capacity is about 200,000 tons. The company seized the opportunity to expand production capacity in previous years, seizing the market vacated by companies that have withdrawn from the industry one after another, leading to a gradual increase in market share. Currently, the company's viscose filament production capacity is about 80,000 tons/year. Production capacity and demand for viscose filament have been stable in recent years, so price changes have been relatively stable, but as consumption upgrades and industry concentration continues to increase, in the long run, the market prospects are still good.

Investment suggestions: Given that downstream carbon fiber maintains a high boom and application scenarios are expanding, and at the same time, the installed capacity of wind power demand and the continuous increase in penetration rate, the company's carbon fiber integration layout can be expected. We expect the company's EPS in 2023-2025 to be 0.08 yuan, 0.13 yuan, and 0.20 yuan respectively; corresponding PE for 2023-2025 will be 50 times, 31 times, and 20 times, respectively. Maintain an “increase in holdings” rating.

Risk warning: The risk that macroeconomic growth rate falls short of expectations, trade dispute escalation, demand in downstream manufacturing industries falls short of expectations, carbon fiber demand falls short of expectations, statistical errors, forecast parameters, assumptions, etc. fall short of expected risks.