Event: The company released its 2023 semi-annual report. In the first half of 2023, the company achieved revenue of 628 million yuan, a year-on-year decrease of 33.37%; realized net profit of 10.71 million yuan, a year-on-year decrease of 87.06%; realized net profit after deduction of 32.37 million yuan, a year-on-year decrease of 59.75%. Among them, 2023Q2 achieved revenue of 333 million yuan in a single quarter, a year-on-year decrease of 32.39%, and a year-on-year increase of 12.72%; realized net profit of 7.21 million yuan, a year-on-year decrease of 114.19%, and a year-on-year decrease of 140.24%; achieved net profit of 20.96 million yuan after deduction, a year-on-year decrease of 55.20%, and a year-on-year increase of 83.72%.

Prices of high-purity chemicals and NMP fell, and 23H1 performance was under pressure. Due to weak terminal demand and fluctuating prices of some raw materials, 23H1's high-purity chemicals and NMP prices fell, putting pressure on 23H1's performance. In terms of semiconductor materials, 23H1's high-purity chemicals achieved revenue of 358 million yuan, a year-on-year decrease of 16.5%. The main reason for the decline in revenue was that the prices of some products fell, but the sales volume of the company's products such as hydrogen peroxide, ammonia, sulfuric acid, peeling liquid, and edge glue cleaning agents all increased year on year. 23H1's photoresist products achieved revenue of 69 million yuan, a year-on-year decrease of 8.73%, mainly affected by weak terminal demand, but 23Q2 improved month-on-month. In terms of lithium battery materials, 23H1's lithium battery materials revenue fell 56.37% year-on-year due to a sharp drop in the price of the core product NMP. According to iFind data, the average price of 23H1 domestic NMP fell by about 51.0% year on year. However, it is worth noting that even at the stage where industry demand is declining, the company still maintains a high R&D intensity. 23H1's R&D expenses are about 29.69 million yuan, which is basically the same as the previous year, and the R&D cost rate increased by 1.57 pct to 4.73% year on year. In addition, 23H1's fair value change income was RMB 32.66 million, mainly due to changes in the fair value of financial asset investment during the reporting period.

Continue to expand production capacity for semiconductor materials and lithium battery materials to promote future growth. In terms of semiconductor materials, the first phase of the company's high-purity sulfuric acid project (30,000 tons) has been officially put into operation, and the second phase (60,000 tons) has reached the expected state of use.

In addition, Hubei Jingrui, a holding subsidiary of the company, plans to have a three-phase semiconductor materials project. After the first phase and the second phase of the project are put into operation, they will develop a production capacity of 105,000 tons and 50,000 tons of electronics-grade materials, respectively. The third phase project is a supporting project with an annual output of 300,000 tons of electronic-grade hydrogen peroxide. In terms of lithium battery materials, the company plans to raise an additional capital of 929.7 million yuan, of which 709.7 million yuan will be used for the construction of “20,000 tons of gamma-butyrolactone, 100,000 tons of electronic grade NMP, 20,000 tons of NMP recycling, and 10,000 tons of conductive paste” (total investment of 850 million yuan).

Profit forecasting, valuation and ratings: Due to falling prices of some high-purity chemicals and NMP, demand for superimposed terminals is weak, and 23H1's performance is under pressure. Considering that the current prices of related products and downstream demand are still yet to recover, we lowered the company's profit forecast for 23-24 and added a 25-year profit forecast. The company's net profit from parent is estimated to be 1.03 (down 56.0%) /1.69 (down 31.5%) /224 million yuan in 23-25, respectively. As a leader in the domestic wet electronics industry, the company continues to expand product range and production capacity. As downstream demand improves, it is expected to resume rapid growth and maintain its “buy” rating.

Risk warning: Product price fluctuation, downstream demand falling short of expectations, production capacity construction risk, product development risk.