The company recently disclosed sales orders for high-end titanium dioxide, and production capacity is expected to gradually be digested. Considering that the company's titanium dioxide production capacity release in 2023 was lower than expected and the recent low price of titanium dioxide, we lowered the company's net profit forecast for 2023-2025 to 2.40, 7.64, and 120 billion yuan. Considering that the company's high-end titanium dioxide production capacity is expected to be gradually released, performance is expected to leap forward at that time, giving the company 40 times PE in 2024, lowering the target price to 65 yuan (originally 70 yuan), and maintaining the “buy” rating.

23H1's share of titanium dioxide revenue increased. In the first half of 2023, the company achieved revenue and net profit of 440,000 million yuan, +8% and -35% year-on-year; titanium dioxide achieved sales revenue of 75.28 million yuan, accounting for 17% of revenue, and titanium dioxide's share of revenue increased.

The hydrochloric acid extraction method of titanium dioxide has been put into production, and production capacity will gradually be released, and costs are expected to be reduced. According to the company's 2022 annual report, the first phase of the titanium dioxide project of Zhengtai New Materials, a wholly-owned subsidiary of the company, has been officially put into operation. Through continuous optimization of production process technology, production capacity continues to be released, and product quality continues to improve. Currently, it is comparable to the standards for imported titanium chloride and iron oxide. The net profit of Zhengtai New Materials, a subsidiary of 23H1, was -20.7 million yuan. The utilization rate of titanium dioxide production capacity was insufficient, and depreciation expenses were high, which dragged down the company's profit. We believe that with the gradual release of the company's production capacity, the unit cost of titanium dioxide is expected to decrease.

An order was signed for high-end titanium dioxide production capacity, which is expected to set a benchmark. Overseas giants occupy the main share of the high-end titanium dioxide market. Comu has a production capacity of 1.25 million tons of chlorinated titanium dioxide and is a representative company for high-end titanium dioxide.

According to the General Administration of Customs, the average import and export prices of titanium dioxide in July 2023 were 3.47 and 2.16 US dollars/kg, respectively, and the competitiveness of high-end titanium dioxide in China is still insufficient. According to the company's announcement, the company's titanium dioxide extraction method TiOEx-803 signed a 10,000 ton sales order with a downstream application in the plastics field. The average sales price including tax was 27,600 yuan/ton, reflecting the recognition by downstream customers of the quality of the company's extracted titanium dioxide. We believe that with the gradual implementation of orders, the company's high-end titanium dioxide production capacity is expected to gradually be digested, and we are optimistic about the company's future development space.

Risk factors: macroeconomic fluctuations; the company's extraction method titanium dioxide market promotion fell short of expectations; the company's extraction method titanium dioxide production line commissioning and commencement level fell short of expectations; the company's by-product iron oxide sales did not progress as expected, resulting in higher processing costs; and the company's fixed increase progress fell short of expectations.

Profit forecast, valuation and rating: Considering that the company's titanium dioxide sales progress since 2023 has been lower than expected and the recent low price of titanium dioxide, we lowered the company's net profit forecast for 2023-2025 to 2.40, 7.64, and 1,200 million yuan (the original forecast was 464, 819, and 1.35 billion yuan). Considering the company's high-end titanium dioxide production capacity construction and commissioning cycle, 2024 may become a key point for capacity release and performance growth. Since the company's listing, the 10/20/40 quantiles of the PE-TTM valuation have been 40/43/58 times, respectively, giving the company 40 times PE in 2024, lowering the company's target price to 65 yuan (the original target price was 70 yuan), and maintaining the “buy” rating.