Description of the event
The company released its 2023 annual report. In the first half of the year, it achieved revenue of 1.34 billion yuan (+31.1% year on year), net attributable profit of 250 million yuan (+71.1% year on year), and realized attributable non-net profit of 230 million yuan (+110.2% year on year). Among them, Q2 achieved revenue of 7.1 billion yuan in a single quarter (+14.4% YoY, +14.4%), attributable net profit of 150 million yuan (+61.9%, +58.1% YoY), net non-attributable profit of 140 million yuan (+63.7% YoY, +63.0%), and Q2's quarterly performance increased month-on-month.
Incident comments
The company continues to shift to compound agents, and production capacity continues to rise. In the first half of the year, the company's revenue increased by 31.1% year-on-year, mainly due to the company increasing the promotion of compound products, increasing development and access work for core customers, allocating high-quality resources, actively connecting with customers, achieving breakthroughs in core customer access, and rapid growth in compound sales. The company's gross margin for the first half of the year was 32.6% (+6.9 pct year on year), mainly due to lower costs due to lower raw material prices and an increase in revenue share of high-margin compound products. The company's cost rate for the first half of the year was 12.0% (+0.8 pct). Among them, the sales, management, finance, and R&D expenses rates changed year-on-year by -0.7, 0.0, +1.6, and -0.1 pct, respectively. The increase in the company's financial expense ratio in the first half of the year was mainly due to a decrease in exchange rate earnings and a decrease in interest income due to changes in exchange rates.
Production capacity is growing rapidly, and the transition to compound agents continues. In terms of production capacity, by the end of 2022, the company had a design annual production capacity of 170,000 tons of lubricant additives, an increase of 69,000 tons/year over 2021. Furthermore, as of 2023H1, the company's annual output of 150,000 tons of lubricant additive series products has reached 43.6%. The first phase of the project, with a production capacity of 60,000 tons, was put into production and use in the third quarter of 2022, partially meeting the company's production capacity needs; the investment progress of the Lubricant Additives Research Center, which has invested 140 million dollars to build, has now reached 10.0%. As the company's production capacity continues to advance, R&D capabilities continue to increase, and continues to transform into high-end composite products, revenue and performance are expected to continue to experience significant growth.
The quality of single dose products is stable, and compound products continue to pass authoritative certification. The company's single-dose products are of stable quality, relatively cost-effective, and have great demand potential in foreign markets. At the same time, it already has a high level of industry popularity and reputation in the domestic market. A complete range of single agents is the basis and prerequisite for compound formulation research and development and compound API certification. It is a solid foundation for transitioning from single agents to compound agents and entering the mainstream market. In terms of compounding agents, the company has now independently mastered the formulation process of CD grade, CF-4, CI-4 grade, CK-4 grade diesel engine oil compound, SE grade, SF grade, SG grade, SJ grade, SL grade, SM grade, SN grade, SP grade gasoline engine oil compound formulation process, natural gas engine oil compound, motorcycle oil compound, marine system oil, marine cylinder oil compound, anti-wear hydraulic oil compound, gear oil compound, etc. Among them, CI-4, SN, SP compounds have passed the formulation process. An authoritative third-party bench test from abroad. As of 2023H1, the company's compound agent revenue accounted for 64.8%, and the transformation and upgrading has been very effective.
Maintain a “buy” rating. The company is a leading supplier of lubricant additives in China and a major supplier of carbonless paper coloring agents in the world. It has a complete R&D and production capacity for single agent types and key raw materials. In 2013, it began to enter the higher-value-added compound business downstream. The product technology is leading in the country, and the compound continues to pass bench tests by an authoritative foreign third party. As the company's production capacity continues to be released, the company is expected to usher in rapid development. The company's net profit to parent for 2023-2025 is estimated to be $740 million, $1.03 billion and $1.33 billion, respectively.
Risk warning
1. The price of upstream raw materials is rising;
2. Downstream demand fell short of expectations; the commissioning of new projects fell short of expectations.