Incident: On the evening of October 27, the company released its 2022 three-quarter report. In the first three quarters of 2022, the company achieved revenue of 18.275 billion yuan, an increase of 29.09% over the previous year; achieved net profit of 4,554 billion yuan, a decrease of 9.17% over the previous year; and achieved net profit of 4,543 billion yuan after deduction, a year-on-year decrease of 8.86%. In Q3 2022, the company achieved revenue of 5.276 billion yuan in a single quarter, down 17.74% year on year and 20.19% month on month; it achieved net profit of 1,009 billion yuan, down 61.62% year on year and 32.42% month on month.

Silicone prices continued to fall, industrial silicon sales shrank, and 22Q3 company performance was under pressure. As downstream demand remained weak, silicone prices continued to fall in 22Q3. According to the company announcement, the prices of the company's main silicone products 110 raw rubber, 107 rubber, mixed rubber, and cyclic silicone fell 47.7%, 40.3%, 34.2%, and 38.1%, respectively, year-on-year in 22Q3, and fell 15.5%, 19.9%, 13.2% and 23.0% from month to month. In terms of industrial silicon, although the price was basically the same as the same month-on-month, the company's industrial silicon sales fell to 115,000 tons in 22Q3, down 28.6% year on year and 31.6% month on month. In 22Q3, the company's industrial silicon sales fell 26.6% year on year and 32.9% month on month. According to iFind data, the average monthly price of domestic industrial silicon began to rise continuously after bottoming out in July.

As of October 27, the average price of industrial silicon in October increased by about 19.6% compared to the average price in July. Considering the gradual recovery in industrial silicon prices, combined with the company's industrial silicon production and inventory situation, we expect the company's industrial silicon sales to improve significantly month-on-month in 22Q4. On the silicone side, as the domestic epidemic is gradually brought under control, combined with the support of the cost of raw materials for tourism, domestic silicone prices may stabilize, and there is even a possibility of a recovery.

Additional production capacity can be expected, and the leading position in the industry is stable. Up to now, the company has industrial silicon production capacity of 1.19 million tons/year and organic silicon monomer production capacity of 1.33 million tons/year. Among them, Eastern Hesheng's 400,000 tons/year industrial silicon production capacity and Shanshan Phase II's 400,000 tons/year silicone monomer production capacity added production capacity during the reporting period, and there is still some room for capacity utilization to climb. Subsequent companies will have the first phase of 400,000 tons/year industrial silicon in Yunnan and the 400,000 tons/year silicone monomer project in Shanshan completed and put into operation by the end of 2022. Looking at the long term, the company also has production capacity plans of 400,000 tons/year of industrial silicon and 800,000 tons/year of silicone monomers. In addition, the company's 200,000 tons/year polysilicon production capacity project in the Xinjiang region is progressing in an orderly manner. After the above construction or planned production capacity is put into operation, the company's current production capacity will nearly double, and the company's leading position in the silicon industry will continue to be stabilized.

Profit forecasts, valuations and ratings: The 22Q3 company's performance was under pressure due to falling silicone prices and declining industrial silicon sales. Considering that the current prices of industrial silicon and silicone products are lower than previous expectations, we lowered the company's 2022-2024 profit forecast. The company's net profit for 2022-2024 is expected to be 61.33 (down 27.6%) /80.26 (down 17.7%) /95.65 billion yuan (down 13.3%), respectively. Combined with the company's silicon material production capacity plans, the company will maintain relatively rapid development in the future, the leading position in the industry will remain stable, and maintain the “increase in holdings” rating.

Risk warning: Product prices fluctuate, downstream demand falls short of expectations, and production capacity construction risks.