Recommended logic: (1) the price of coal tar from the upstream raw material has dropped sharply, which is 18% lower than that at the beginning of the year; the demand of the downstream tire industry has gradually recovered, and the operating rate has been close to 75%. The price of the company's products has stabilized, which is expected to bring performance improvement and elasticity. (2) the performance of special carbon black is excellent, and the global demand for special carbon black will increase at a rate of more than 18% from 2020 to 2025. It is estimated that the market demand for highly dispersed silica in China will reach 1.56 million tons and the market size will exceed 10 billion. Open up the growth space of highly dispersed silica. The company continues to enrich the product structure of special carbon black, expand the production of highly dispersed silica, and the increase in the proportion of high value-added products will enhance the profitability of the company. (3) Conductive carbon black for shielding materials for medium and low voltage power cables has the first domestic market share, and entering into the field of conductive carbon black for shielding materials for high voltage cables is expected to break through the neck technology and build core competitiveness.

Carbon black: the economy is on the rise, prices have a tendency to stop falling, and carbon black enterprises are expected to reverse the loss situation. From the perspective of raw materials, the price of coal tar in the upper reaches of 2023 first fell rapidly and began to pick up in mid-May, supporting the price of carbon black; on the demand side, the current factors restricting tires have improved, the number of domestic residents going out has increased, and economic growth has resumed. Overseas orders gradually resume, logistics freight volume resumes to speed up the tire replacement cycle, and the operating rate of the downstream tire industry is also picking up, which is close to 75%. It is significantly higher than last year, and the market is expected to pick up faster for the whole year.

The operating rate of carbon black has risen from 47.2% at the beginning of the year to 60.2%, and there are not many plans for parking and overhauling. Carbon black prices have a downward trend, and carbon black enterprises are expected to reverse the loss situation.

Pay attention to the progress of industrialization of high-end conductive carbon black. The process of special carbon black is complex, and the added value is higher, in which the demand of conductive carbon black is also increasing rapidly with the significant increase of the consumption of lithium-ion battery. At present, conductive carbon black is the most mainstream conductive agent, which is mainly monopolized by French Yiruishi, Japanese Lion King and Japanese electrochemistry. Domestic conductive carbon black has been imported for a long time. With the outbreak of the domestic lithium battery industry, domestic enterprises began to tackle the problem of high-end lithium conductive carbon black, which has a large domestic alternative space. According to our estimates, the global conductive carbon black market will be about 6.47 billion yuan to 86.3 billion yuan by 2025, an increase of 90% over 2022, while China's conductive carbon black market will be about 4.72 billion yuan and 6.29 billion yuan, an increase of 110% over 2022.

Silicon dioxide: low-end overcapacity, high-end products rely on imports. China's silica products are mainly precipitated silica, and tires are the first major application field. Thanks to the pull of the automobile industry, the demand for silica in China is growing rapidly, and the demand for GAGR in 2015-2021 is close to 7%. From the perspective of industry supply and demand, the concentration of capacity is high, the output is always greater than the apparent consumption, the overall supply exceeds demand, and the output is digested by exports. From the perspective of import and export unit price, the average import unit price is 2-3 times of the export average unit price, which shows that there is low-end overcapacity in China's silicon dioxide industry, and high-end products need to rely on imports because of the high technical threshold. At present, the proportion of silica used in tire, pesticide, veterinary drug and feed industry in China is similar to that in the world, but the consumption in middle and high-end industries, such as paint and toothpaste, is low, and the domestic paper industry is basically blank. It is expected that there will be more room for growth in these sub-industries in the future.

Green tires bring about a great-leap-forward growth in demand for highly dispersed silica. The performance of green tire is excellent, and highly dispersed silica is the key material of green tire tread formula. The formulation and implementation of tire label regulations in many countries has forced the global green tire permeability to increase; the raw material consumption caused by tire rolling resistance accounts for 30% of the total vehicle fuel consumption, and high oil prices have also boosted the market demand for low fuel consumption green tires. At present, the global green tire market is mainly concentrated in Europe, and China's permeability is on the low side. As a big tire country, China's green tire market will usher in rapid development, which is expected to bring China's highly dispersed silica market demand of 1.56 million tons, with a market scale of more than 10 billion.

Multiple competitive advantages to build core barriers. The company currently has a carbon black production capacity of 125,000 tons / year, silicon dioxide production capacity of 166,000 tons / year. (1) the company is located in Shandong, a major province of tire and chemical industry, and has the dual location advantages of purchasing and selling; (2) the downstream tire customer certification cycle is long, the entry barrier is high, and the company has established a stable cooperative relationship with well-known enterprises. High quality and stable customer resources support the continuous growth of the company's business. (3) expanding the production of highly dispersed silica and laying out the special carbon black market ahead of time, with the increase in the proportion of high value-added products, the company's profitability will be significantly improved; (4) seize the opportunity of new energy, power and supporting industries, enter into the field of conductive carbon black for high cable shielding materials, it is expected to break through the neck technology and enhance the company's long-term sustainable development ability.

Profit forecast and investment advice. It is estimated that the EPS from 2023 to 2025 will be 0.69 yuan, 0.89 yuan and 1.68 yuan respectively, and the net profit of homing will increase by 24.77%, 30.23% and 87.32% in the next three years. We select Black Cat shares and Qingcheng shares, the leading domestic carbon black and silicon dioxide enterprises, as comparable companies. The average PE of the two companies in 2023 is 26 times. The company continues to improve the product structure, using nano-carbon materials for high-voltage cable shielding materials, giving the company 28 times PE in 2023, corresponding to the target price of 19.32 yuan, and giving a "buy" rating for the first time.

Risk tips: macroeconomic downside risk, raw material price fluctuation risk, project progress less than expected risk, downstream demand lower than expected risk.