Incident: The company released its 2022 annual report, with operating income of 860 million yuan, down 15% from the previous year; Guimu's net profit was 260 million yuan, down 38% from the previous year. Among them, 22Q4's revenue was 160 million yuan, a decrease of 16% over the previous month; the net profit of the mother was 0.4 billion yuan, an increase of 44% over the previous month. In terms of profitability, the company's gross profit margin in '22 was 46.8%, down 15.3 pct from the previous year, and the net profit margin was 29.7%, and -11.5pct from the previous year. Among them, the 22Q4 company's gross profit margin was 26.5%, down 43.0 pct year on year and 0.4 pct month on month; 22Q4 company net profit margin was 21.0%, -43.0 pct year on year, +8.8 pct month on month. With the gradual release of new production capacity for electrolyte additives in the industry, additive prices fell a lot year-on-year, leading to a decline in revenue and profit. At the same time, the company's fund-raising project is still under construction, and it is temporarily impossible to expand the market using the additional production capacity, which has led to a decline in the market share of the company's products.

In '22, the company's VC sales volume was 3,348 tons, up 10% year on year; FEC sales volume was 2,249 tons, up 16% year on year; the overall average tonnage net profit was 47,000/ton. The company's shipment volume is expected to decline year-on-year in 23Q1, and there will be a significant recovery after Q2.

The company's sales volume is expected to increase in '23 as production capacity is released. Currently, the company's annual production capacity of VC and FEC products is 5,000 tons. The company raised a VC6000 ton project, and construction of FEC3000 tons is progressing in an orderly manner, and Q2 trial production is expected in '23. It is estimated that 11,000 tons of additives will be shipped in '23, including 7,000 tons of VC and 4000 tons of FEC. The first phase of the 500-ton project of the “3000 tons/year lithium bifluorosulfonimide project” built by subsidiary Shengmei Lithium Battery (the company holds 51% of the company's shares) is expected to begin trial production in 2023. The subsidiary Huasheng Lianying, and the newly built “low energy consumption high performance lithium battery anode material project with an annual output of 200,000 tons” is progressing smoothly.

Profit forecast: It is estimated that 11,000 tons of additives will be shipped in '23, including 7,000 tons of VC and 4,000 tons of FEC; gross margin is expected to decline year-on-year due to the expansion of production capacity in the industry. It is estimated that LiFSi will have a production capacity of 500 tons and ship about 250 tons in '23. It is estimated that a production capacity of 40,000 tons of anodes will be built in '23, and around 5,400 tons will be shipped. Due to falling product prices, we expect the company to return net profit of 204.0 to 280 million in 23-24 (previous value of 660 million and 770 million), corresponding to the valuation of PE 36 to 26 times, maintaining the “increase in holdings” rating.

Risk warning: downstream demand falls short of expectations, increased risk of market competition, risk of changes in raw material prices, and capacity expansion falls short of expectations.