1H23 performance fell short of our expectations
The company announced 1H23 results: revenue of 7.21 billion yuan, -28.8% year-on-year; net profit of 280 million yuan per share, corresponding to profit of 0.13 yuan per share, -83.2%, lower than our expectations, mainly due to the decline in prices of fluoropolymers, silicone and other products caused by a slow recovery in downstream demand and the weakening of prices after an imbalance between supply and demand for lithium PVDF.
Development trends
Fluoropolymer is the leader and is optimistic about long-term growth. Judging from the current production capacity, the company has production capacity of 5.5 and 25,000 tons/year for PTFE and PVDF respectively, and is further developing high-quality products in the fields of 5G, dry electrodes, and ternary cathode adhesives. We are optimistic about the company's leading position in fluoropolymers. At the same time, according to the company's project EIA, the company plans to invest in 1) 8000 tons/year PCTFE project; 2) 10,000 tons/year ETFE and 2000 tons/year PPVE project; 3) 12,000 tons/year high-end fluorinated fine chemicals project, mainly including 3,500 tons/year of hydrofluoride, 1000 tons/year of perfluorohexanone, 6000 tons/year of hexafluoropropylene oligomers, 800 tons/year of perfluoropolyether oil, 700 tons/year of hexafluoroepoxy derivatives, etc. High-end fluoropolymers and organic fluorine are still mainly supplied from overseas. These products are growing rapidly downstream in the fields of data center cooling, semiconductor cooling, and energy storage power plant fire extinguishing. We are optimistic that the company's profit will reach a new level after these projects are launched.
The quota policy will be introduced, and it is optimistic that the long-term HCFCs boom will rise under policy constraints. According to the Kigali amendment, China should freeze the production and use of HFCs at the baseline level in 2024. We believe that the 2H23 plan is expected to be determined, and third-generation refrigerants are expected to usher in a cycle reversal. Specifically: 1) From the 2024 dimension, assuming that 65% of the HFCs share will not be distributed to enterprises, compounded by the rapid year-on-year growth rate of air conditioning production this year, 1H23 manufacturers will actively go to storage. We believe that supply and demand in 2024 are expected to be tightened, and refrigerant prices are expected to rise gradually; 2) From a long-term perspective, the quota plan is expected to be determined by the end of the year, and the industry supply pattern will be determined optimization, enterprise The business strategy is expected to shift from market share priority to profit priority, and the industry is expected to enter a long-term upward trend. At the same time, alternatives to fourth-generation refrigerants are difficult to implement in the short term due to overseas patent monopolies and high costs, and profits and company valuations in the third-generation refrigerant industry are expected to improve over the long term.
Profit forecasting and valuation
As downstream demand slowly recovered, we lowered our net profit for 2023 and 2024 by 63% and 45% to $1.08 billion and $1.78 billion. The current price-earnings ratio for 2023/2024 is 12.2x and 7.2x, respectively. We are optimistic about the long-term development potential of the company's new projects after they are put into operation and maintain an outperforming industry rating. We lowered our target price by 27% to 8 yuan/share, corresponding to the price-earnings ratios of 16.7x and 10.1x for 2023/2024, respectively, with 15.6% upward space compared to the current stock price.
risks
The recovery in downstream demand fell short of expectations, competition intensified, and project commissioning did not go smoothly.