Incident: On April 25, 2023, Shandong Heda released its 2022 annual report and the first quarterly report of 2023: the company achieved revenue of 1,723 million yuan in 2022, +10.44% year on year; achieved net profit of 354 million yuan, +7.36% year on year; weighted average ROE was 20.65%, -3.30 pcts year on year. Gross profit margin was 34.20%, year-on-year - 2.36 pcts; net sales margin was 20.53%, year-on-year - 0.59 pcts; net cash flow from operating activities was 300 million yuan.

Among them, in the single quarter of 2022/Q4, revenue was 391 million yuan, +0.49% year on year, -7.85% month on month; net profit returned to the mother was 48 million yuan, -9.33% year on year and -40.45% month on month. Gross profit margin of 29.54%, year-on-year - 3.77 pcts, month-on-month - 1.68 pcts; net sales margin was 12.25%, year-on-year - 1.33 pcts, -6.71 pcts month-on-month; net cash flow from operating activities was 79 million yuan.

Q1 2023 achieved revenue of 375 million yuan, -4.30% year on year, -4.18% month on month; net profit of the mother was 73 million yuan, -24.43% year on year, +51.83% month on month; the weighted average ROE was 3.80%, -2.23 pcts year on year. The gross profit margin of sales was 31.00%, -7.43 pcts year on year, +1.46 pcts; net sales margin was 19.41%, year-on-year - 5.17 pcts, +7.16 pcts; net cash flow from operating activities - 0.07 million yuan.

Comment:

The cellulose ether sector performed well in 2022, and overseas demand for vegetable capsules was weak, and the company's performance increased slightly in 2022. In the cellulose ether sector, 2022 revenue was 1.156 billion yuan, +18.5% year-on-year, gross profit of 354 million yuan, +12.2% year-on-year, gross profit margin of 30.6%, year-on-year -1.7 pct. The company actively promoted the development of overseas markets. The annual profit of cellulose ether products exceeded expectations; the annual self-produced sales volume of cellulose ether was 34,600 tons, -1.7% year-on-year, with an average sales price of 33,400 yuan/ton, +20.5% year-on-year, thanks to the continuous improvement of the product portfolio, excellent performance of high-value-added products, C-series modified hydroxyethyl cellulose, 60HD cellulose ether, 60HD /75HD Cellulose ether products such as pharmaceutical-grade cellulose ether and HPMC/MC food-grade cellulose ether have been verified by customers. At present, stable supply has led to an increase in average sales prices, and resilience to risks continues to increase.

The plant-based capsule sector had revenue of 276 million yuan in 2022, -13.1% year on year, achieving gross profit of 165 million yuan, -18.2% year on year, gross profit margin of 60.0%, and -3.7 pct year on year. Affected by high inflation and demand fluctuations in Europe and the US, plant-based capsule sales declined significantly, and performance fell short of expectations; annual sales volume was 11.993 billion capsules, -15.3% year on year, with an average sales price of 2.3002 million yuan/100 million capsules, +2.6% year on year.

In terms of the cost rate for the period, the company's sales/management/finance/R&D expenses ratio in 2022 was 1.43%/6.93%/-1.02%/3.93%, respectively, with year-on-year changes of +0.16/+1.40/-1.66/-0.60 pct respectively. Annual financial expenses - $18 million, mainly due to increased exchange earnings and interest rate receiving loans to reduce financial expenses; management expenses amounted to 120 million yuan, +38.51% year on year, mainly due to expenses related to production line maintenance.

The 2023Q4 performance was under pressure due to demand for vegetable capsules. The 2023Q1 performance improved month-on-month, and the 2022Q4 company achieved net profit of 48 million yuan, or -33 million yuan over the previous month. It was mainly affected by the decline in gross profit and the increase in expenses during the period. On the one hand, affected by weak demand for downstream vegetable capsules, revenue and gross margin declined slightly in Q4 2022, with gross profit of -18 million yuan month-on-month; on the other hand, due to exchange rate fluctuations, etc., exchange earnings declined, leading to financial expenses of +16 million yuan month-on-month.

In 2023Q1, the company achieved net profit of 73 million yuan to the mother, +25 million yuan over the previous month. The company's revenue decline narrowed month-on-month in the first quarter, while gross sales margin was +1.46pct month-on-month, making gross profit basically flat month-on-month; performance improved month-on-month, mainly due to management expenses of -13 million yuan month-on-month and investment income of +16 million yuan month-on-month.

Projects under construction are progressing in an orderly manner, and capacity expansion of multiple products helps future growth

The company is rich in projects under construction, continues to expand capacity for multiple products, and has sufficient growth momentum. The first phase of the Gaoqing Cellulose Ether Project was successfully delivered in November 2022. All of the offline products passed the test. It will add 20,000 tons/year of building material grade and 10,000 tons/year of pharmaceutical and food grade cellulose ether production capacity, laying the foundation for further market development in the future. The production line for pure vegetable capsules was completed and trial production began. The second-generation vegetable capsule products completed technical reserves and received customer recognition. As the company continues to develop the market, vegetable capsule production and sales are expected to recover. The construction of the Mittega plant-based meat project progressed in an orderly manner, and additional production capacity was achieved as early as Q4 2023. Furthermore, in April 2022, the company announced a convertible bond fundraising project, and the application for issuing convertible bonds was approved by the Shenzhen Stock Exchange on April 21, 2023.

From the perspective of fixed assets and ongoing projects, according to the company's 2022 annual report, the company's fixed assets are 802 million yuan, and the projects under construction are 1,412 million yuan. As the construction of the projects under construction is completed and consolidated, the company's fixed assets are expected to double.