Events:
On August 24, 2018, Lottery Chemical released its semi-annual report of 2018, with operating income of 755 million yuan in the first half of the year, an increase of 24.3% over the same period last year, gross profit of 257 million yuan, an increase of 64.3% over the same period last year, and profit attributable to equity holders of 122 million yuan, an increase of 111.3% over the same period last year. The company's gross profit margin in the first half of the year was 34%, an increase of 8.3% over the same period last year, and the operating profit margin was 16.1%, an increase of 6.6% over the same period last year.
The growth of the company's performance mainly comes from the high demeanor of the business of dyes and agrochemical intermediates. According to the China Daily, the company's sales of dyes and agrochemical intermediates reached 609 million yuan, up 20.3 percent from the same period last year; gross profit was 207 million yuan, up 72.5 percent from the same period last year; and the unit price of sales reached 1.99 million yuan per ton, an increase of 54.3 percent over the same period last year. Under the trend of high pressure normalization of environmental protection, the company's intermediate business is expected to continue.
Main points of investment:
The company is the global leader of dyestuff and pigment intermediates with significant advantages in integration. In terms of dye intermediates, the company has a production capacity of 35000 tons of DSD acid, accounting for 53% of the global market share; in terms of pigment intermediates, DMSS and DMAS each have a production capacity of 4500 tons, accounting for 42.7% and 19.8% of global production, respectively, of which DMSS leads the world. In addition, the company is also one of the three largest production bases of nitrotoluene in the world, accounting for 18.8% of the global market, in which p-nitrotoluene (PNT) is the main raw material of the company's DSD acid; the company has created an integrated upstream and downstream industrial chain of "PNT-DSD acid-OBA" with a significant competitive advantage.
Benefit from the high pressure of environmental protection, the business of dye intermediates is very prosperous. The company's core product DSD acid and its raw material PNT are highly polluting varieties. In recent years, with the tightening of environmental protection supervision, small-scale production capacity that does not meet the environmental standards has been gradually withdrawn, while the company's own environmental protection technology capacity is strong, and the impact of environmental protection is limited. Therefore, with the substantial increase in the price of DSD acid and other products, the company's profit has also been greatly improved. In addition, the company took advantage of the policy Dongfeng to vigorously promote the environmental protection technical consulting business, with technical service business revenue of 13.94 million yuan and gross profit of 33.5% in the first half of 2018. It is expected that with the normalization of environmental protection pressure, the company will continue to benefit.
The commissioning of new projects will strengthen industry barriers and increase the source of profits. The company's 20,000 tons of DSD acid in Dongying, Shandong Province is expected to be put into production in 2019. After putting into production, the company will have a production capacity of 55000 tons of DSD acid, with significant economies of scale and market pricing power will be further strengthened. In addition, the company invested 15000 tons of lithium battery cathode material precursor iron phosphate production line in Cangzhou, Hebei Province in early 2017, which has now completed trial production and is expected to be put into production by the end of 2018; in the future, driven by the new energy vehicle market, lithium iron phosphate cathode materials are expected to enter the fast track of development.
Profit forecast and investment rating: give "overweight" rating. The company is the global leader of dyestuff and pigment intermediates. DSD acid and other products are in short supply under environmental protection and high pressure. We are optimistic about the company's long-term development in the field of intermediates. It is expected that with the gradual launch of new production capacity such as DSD acid and ferric phosphate, the company's profits will grow further. We estimate that the EPS of the company from 2018 to 2020 is 0.29,0.32,0.34 yuan per share, respectively, and the PE of the corresponding share price is 16.31,14.78 and 13.91 times, respectively. Coverage for the first time, giving a "overweight" rating.
Risk tips: product prices fall sharply; competitors resume production or expand production; new project launch schedule is not as expected.