Currently, demand in the PCB chemicals industry is at the bottom. The subsequent recovery in domestic consumer electronics will drive a recovery in demand for PCB chemicals. As a leader in the domestic PCB chemicals business, the business is expected to continue to recover in the future. The company has a full range of advantages in the lithium battery recycling field, such as process technology and recycling channels, and is expected to achieve rapid growth in performance with the rapid release of production capacity. Considering that the company's PCB chemical operating rate is at the bottom at this stage, compounded by fluctuations in cobalt prices that continue to drag down profitability, and the impact of falling lithium carbonate prices, we lowered the company's 2023-2024 net profit forecast to 245/362 million yuan (the original forecast was 402/499 million yuan), adding the 2025 net profit forecast of 515 million yuan. The corresponding EPS forecast was 0.62/0.91/1.29 yuan respectively, and the target price was raised to 26 yuan to maintain the “buy” rating.

The volume of the lithium battery materials business helped the company's 2022 performance increase significantly year over year. In 2022, the company achieved revenue of 3.302 billion yuan, an increase of 27.99% over the previous year; it achieved net profit of 117 million yuan to the mother, an increase of 87.60% over the previous year.

In 2022, PCB chemical revenue was 1,444 million yuan, down 15.05% year on year, achieving gross profit margin of 11.07%, down 1.63 pcts year on year; chemical reagent revenue was 391 million yuan, up 27.75% year on year, achieving gross profit margin of 30.22%, up 0.10 pct year on year; lithium battery materials revenue was 1,293 million yuan, up 318.80% year on year, achieving gross profit margin of 16.65% year on year, up 5.52 pcts year on year.

The consumer electronics market was weak and cobalt prices fell, and fourth-quarter results were under pressure year over year. 2022Q4 was affected by the epidemic and other factors, and the downstream smartphone and consumer electronics markets continued to be sluggish, and the company's profit declined by a certain margin due to falling demand for PCB chemicals. Furthermore, the penetration rate of ternary batteries declined, and the amount of cobalt metal used in ternary batteries was gradually reduced, which directly led to a continuous decline in cobalt prices, and the profitability of the company's related ternary lithium battery recycling products was under pressure year over year. Under the influence of the above factors, 2022Q4's performance declined month-on-month, achieving revenue of 623 million yuan, a decrease of 31.94% from the previous month; achieving net profit of 10 million yuan to the mother, down 59.28% from the previous month.

Expand the advantages of lithium battery recycling scale and accelerate the deployment of lithium battery material production capacity. In 2022, the company completed the construction of a 10,000 tons/year comprehensive recycling production line and 40,000 tons/year of decommissioning, sorting and utilization production projects for decommissioned lithium batteries. In the future, the company will continue to vigorously develop a new energy business focusing on the comprehensive utilization of lithium battery materials and decommissioned power batteries.

In 2022, the company continued to carry out the construction of 36,000 tons of lithium manganese-ferrophosphate and iron phosphate cathode materials in the existing plant area. Furthermore, the recycling capacity of the new 50,000 tons of lithium iron phosphate batteries is expected to be put into operation in 2024, which will further reinforce the company's first-mover advantage in lithium battery recycling.

Continue to expand lithium battery recycling channels to ensure large-scale development of recycling business. The regulation of the lithium battery recycling industry is quite limited. There are certain difficulties in establishing stable recycling channels between upstream waste battery holders and downstream recycling companies, which greatly limits the large-scale development of lithium battery recycling enterprises. In 2022, the company established strategic cooperation with Aodong New Energy, Panasonic China, and Ground Railway in the fields of tiered battery utilization and lithium battery recycling.

By cooperating with new energy vehicles and other related enterprises, the company binds the sources of waste batteries and establishes stable and unobstructed recycling channels, which will effectively guarantee the company's ability to develop in the field of recycling decommissioned power batteries.

Risk factors: The development of the lithium battery recycling industry fell short of expectations; metal prices fluctuated greatly; the release of production capacity fell short of expectations; competition in the lithium battery recycling industry intensified.

Profit forecasting, valuation and ratings: Currently, demand in the PCB chemicals industry is at the bottom. The subsequent recovery in domestic consumer electronics demand is expected to drive a recovery in PCB chemical demand. As a leader in the domestic PCB chemicals business, the business is expected to continue to recover in the future. The company has a full range of advantages in the lithium battery recycling field, such as process technology and recycling channels, and is expected to achieve rapid growth in performance with the rapid release of production capacity. Considering that the company's PCB chemical operating rate is at the bottom at the bottom, compounded by fluctuations in cobalt prices that continue to drag down the company's profitability and the impact of falling lithium carbonate prices, we lowered the company's 2023-2024 net profit forecast to 245/362 million yuan (the original forecast was 402/499 million yuan), adding 515 million yuan to the 2025 net profit forecast. The corresponding EPS forecast was 0.62/0.91/1.29 yuan respectively. According to DCF's valuation, we believe the company's reasonable market value is 10.47 billion yuan, and the target price was raised to 26 yuan to maintain the “buy” rating.