Incident: The company released the 2023 semi-annual report. In the first half of the year, the company achieved operating income of 176 million yuan, a year-on-year decrease of 26.57%; in the first half of the year, the company achieved net profit of 49 million yuan, a year-on-year decrease of 42.01%; realized net profit of 37 million yuan deducted from non-attributable income, a year-on-year decrease of 55.28%.

Short-term performance is under pressure due to a slowdown in downstream production expansion and new business layout

In the first half of 2023, the company achieved operating income of 176 million yuan, a year-on-year decrease of 26.57%; in the first half of the year, the company achieved net profit of 49 million yuan, a year-on-year decrease of 42.01%; net profit of non-attributable net profit was 37 million yuan, a year-on-year decrease of 55.28%. Among them, the smart equipment business for household paper achieved revenue of 128 million yuan, a year-on-year decrease of 42.10%; the expansion of the household paper packaging film materials business achieved revenue of 38 million yuan, an increase of 351.69% over the previous year.

The main reason for the decline in the company's overall revenue and performance compared to the same period was the slowdown in production expansion for downstream customers of papermaking equipment, which accounts for a relatively large portion of the business. At the same time, under current production capacity conditions, the company prioritized the lithium battery separator equipment business, which led to a slowdown in the delivery and inspection of household paper equipment.

Paper equipment, which is the traditional main business, is under pressure in the short term, and is expected to benefit from import substitution and consumption upgrades in the future

Paper equipment has been imported and replaced, and customer resources are of high quality. The company's self-developed household paper equipment has filled the gap in similar products in China. The main customers include four leading paper companies: Jinhongye, Hengan Group, Zhongshun Jierou, and Vida Group. High-quality customer resources provide a strong guarantee for the long-term steady growth of the company's performance. In 2012-2021, the per capita consumption of household paper in China increased from 4.3 kg to 8.2 kg, with a compound annual growth rate of 7.4%. However, compared with developed countries and regions, there is still a lot of room for growth in the future.

Lithium battery diaphragm equipment has a broad space and is expected to create the company's second growth curve

The market space for lithium battery diaphragm equipment is vast, and the wave of localization is unstoppable. Currently, most of the equipment of diaphragm companies is imported from foreign manufacturers. Prices are high and supply is limited. According to our estimates, the total market space for diaphragm equipment from 2022 to 2025 will exceed 50 billion yuan, of which the wet diaphragm equipment market space accounts for about 90%, and the market space for diaphragm equipment is quite broad.

Cross-border production of lithium battery diaphragm equipment creates a second growth curve. The company's household paper equipment, packaging material production equipment and lithium battery separator production equipment are very similar in principle and structure. The main difference is stretching equipment and extraction equipment. The company used a common technology platform to independently develop a lithium battery separator production line, and has signed a wet diaphragm production line contract with Jiujiang Guanli (tax inclusive amount is 88 million yuan). In the future, the lithium battery separator equipment business is expected to become the company's second growth curve.

Profit forecast: Considering that the company will focus on the lithium battery separator equipment business in the future, we lowered the revenue and profit forecast for household paper equipment for 2023 and 2024, and added the profit forecast for 2025. The company's net profit for 2023-2025 is expected to be 285 million, 422, and 622 million yuan respectively (the profit forecasts for 2023 and 2024 before adjustment were 360 million yuan and 485 million yuan, respectively), and the corresponding PE was 18.13, 8 times, respectively.

Risk warning: Production line R&D delivery falls short of expected risks; project expansion and progress falls short of expectations; risk of industry policy fluctuations.