Event: On April 25, the company released the first quarter report of 2023, achieving operating income of 375 million yuan, down 4.3% year on year, down 4.18% month on month; achieved net profit of 73 million yuan, down 24.43% year on year, up 51.83% month on month; corresponding gross profit margin was 31%, down 7.43 pct year on year, up 1.46 pct month on month; corresponding net interest rate was 19.41%, down 5.17 pct year on year, up 7.16 pct year on month. The fee rate for the 2023Q1 period was 7.78%, a year-on-year decrease of 2.22pct and a month-on-month decrease of 3.61 pct. Furthermore, the company achieved investment income of 16 million yuan in joint ventures and joint ventures in 2023Q1.

Cellulose ether stabilizes, and vegetable capsules warm up. Orders for cellulose ether increased year-on-year, with exports accounting for around 60%.

Prices are expected to decline slightly with fluctuations in prices of major raw materials and changes in supply and demand patterns. According to Baichuan Yingfu, the prices of the main raw materials cotton wool, chloromethane, propane oxide, and liquid alkali 2023Q1 were 4,704.39 yuan/ton, 2888.89 yuan/ton, 9822.92 yuan/ton, 1059.83 yuan/ton, with month-on-month changes of +11.2%, -10.01%, +6.45%, -17.09%, -17.09%, respectively. There are signs of a recovery in demand for 2023Q1 vegetable capsules. Furthermore, the company is actively deploying second-generation vegetable capsules, and second-generation vegetable capsule products have completed technical reserves and received customer recognition.

The release of additional production capacity is expected to contribute to the increase in performance. As of the end of the first quarter of 2023, the company's projects under construction were 1,452 million yuan, an increase of 41 million yuan over the end of 2022. With the 410,000 tons of cellulose ether under construction and 5 billion vegetable capsules completed and put into operation, the future production capacity of cellulose ether and vegetable capsules is expected to reach 75,000 tons and 35 billion capsules respectively. In November 2022, the first phase of Heda Polymer's 30,000 tons/year cellulose ether project was successfully fed once, and all of the offline products passed testing. The project included two production lines: a cellulose-mixed ether production line that alternately produces 10,000 tons of hydroxypropyl methylcellulose (HPMC) and 10,000 tons of hydroxyethyl methylcellulose (HPMC); a 10,000 ton hydroxypropyl methylcellulose (HPMC) production line. Currently, the additional production capacity has not been officially produced and marketed.

Investment advice: The company's earnings per share in 2023-2025 are estimated to be 1.09, 1.31, and 1.51 yuan respectively, corresponding to the current stock price of PE 18, 15, and 13 times, respectively. The company is a domestic leader in cellulose ether and vegetable capsules. Considering the gradual release of new production capacity and the continued recovery in demand in the future, it is expected to guarantee long-term growth in performance and maintain the “buy” rating.

Risk warning: The progress of projects under construction falls short of expectations; the recovery of downstream demand falls short of expectations; risk of product price fluctuations.