3Q22 performance is in line with our expectations

The company announced 3Q22 results: revenue 5.28 billion yuan, year-on-year-17.7%; return to the mother net profit of 1.01 billion yuan, year-on-year-61.6%, corresponding to 0.94 yuan per share, in line with our expectations.

From the perspective of operating data, 3Q22 is affected by the epidemic, although industrial silicon and silicone have new production capacity, but the increment is limited. In addition, silicone prices fell sharply compared with the same period last year and month-on-month, which is a great drag on the company's performance.

Trend of development

The demand is on the rise, and we are optimistic about the recovery of industrial silicon. Compared with the unilateral upward market in 2021, the price trend of industrial silicon in 2022 is more repeated, which we believe is mainly due to the slower growth on the demand side (especially organosilicon and silicon-aluminum alloy). The incremental realization of the superimposed supply side (such as 400000 tons of Hesheng and higher start-up load in the southwest of the dry season). Looking forward, we believe that the demand support is still mainly from the commissioning of polysilicon. According to the Silicon Industry Branch, the monthly production and sales of polysilicon is expected to increase from ~ 50,000 tons at the beginning of the year to ~ 100000 tons at the end of the year. On the other hand, although there is a lot of silicone production expansion this year, due to the declining prosperity of the industry, the silicone industry has limited capacity to absorb high-priced industrial silicon.

The sharp decline in silicone prices and earnings year-on-year is the main reason for the decline in 3Q22 performance compared with the same period last year, and the bottom of the industry is expected to fluctuate in the short term. Silicone prices and profits have fallen sharply due to the rapid expansion of industry capacity and the slowdown in demand growth at the end of 2022. The average price of 3Q22 silicone fell 41% to 20,000 yuan / ton compared with the same period last year, and the net profit per ton fell 89% to 1707 yuan / ton. Organosilicon is a big drag on the company's performance. Looking forward, according to Zhuangchuang, the company will have 200000 tons of silicone DMC production capacity this year, and Xingfa Inner Mongolia will also add 200000 tons of DMC capacity in 2023. Even considering the recovery of industry demand growth of about 10% in 2023, we judge that the industry will still show an oversupply and the industry may continue to fluctuate at the bottom.

Polysilicon business to promote Hesheng to a new level, the market may not be fully expected. The company announced at the beginning of this year that it plans to invest 17.5 billion yuan in the construction of 200000 tons of polysilicon projects. We expect the first phase of 100000 tons to be put into operation in 1Q23 and the second phase of 100000 tons to be put into production by the end of 2023. Due to the strong profitability of polysilicon (the current net profit per ton is ~ 200,000 yuan / ton), we think that polysilicon may help the company to a new level. In addition, the company has advantages in integration, energy, power and scale, and is expected to gain a place in the polysilicon industry in the future.

Profit forecast and valuation

The epidemic repeatedly had a negative impact on the company's production and operation. We lowered the company's 2022 profit forecast by 16% to 6.17 billion yuan, and basically maintained the 2023 profit forecast of 11.89 billion yuan. The current stock price corresponds to the price-to-earnings ratio of 19x10 in 2023. We maintain the company's target price of 160 yuan, corresponding to 14 times 2023 price-to-earnings ratio, 49% upside compared to the current stock price, and maintain an industry rating that outperforms.

Risk

Macroeconomic downturn; silicone production expansion accelerated; the company's project progress is lower than expected.