Incident: Recently, Quecheng Co., Ltd. released its semi-annual report for 2023. The company achieved operating income of 850 million yuan in the first half of 2023, a year-on-year decrease of 4.09%; realized net profit of 192 million yuan, a year-on-year decrease of 4.54%. In the second quarter of 2023, revenue was 435 million yuan, down 2.35% year on year, and 4.74% month on month; net profit was 108 million yuan, down 8.02% year on year, and 28.29% month on month.

Comment:

Volume has increased but prices have fallen. Fluctuations in raw material prices have a certain impact on the company's performance. (1) Sales volume in the second quarter was at the best level in a single quarter. The production capacity of the company's main product, silicon dioxide, was released one after another. In the second quarter, the company sold 73,300 tons, an increase of 20.12% over the previous year, setting the company's largest sales volume in a single quarter in history. (2) The unit price of the product falls along with the price of raw materials, which drags down the company's revenue. According to the company announcement and our estimates, the unit price of the company's products and the price of comprehensive raw materials fell by 12.99% and 13.24% year-on-year respectively in the second quarter, mainly due to price reductions for raw materials such as quartz sand and sulfur. (3) Production line overhauls have a brief impact on costs. From the end of 2022 to August 2023, the company's two sodium silicate raw material lines entered the overhaul stage one after another. Production was reduced, and the raw material production cost remained high, which had an adverse impact on the production cost of the product silicon dioxide.

New energy vehicles are growing rapidly, tire operating rates have clearly recovered, and downstream demand is expected to recover. (1) New energy vehicles are expected to drive demand for highly dispersed white carbon black for a long time. Vehicle sales in the first half of 2023 were 13.1227 million units, an increase of 8.84% over the previous year. Among them, production and sales of new energy vehicles reached 3.788 million units and 3.747 million units respectively, with year-on-year increases of 42.4% and 44.1%, respectively, with a market share of 28.3%. As a special auxiliary material for green tires, highly dispersed silicon dioxide can effectively reduce rolling resistance, so it is expected to fully benefit from the boom in new energy vehicles. (2) Downstream tire construction has started and exports have recovered significantly. In the first half of 2023, China's tire operating rate, production volume, and export volume all remained relatively high. Production increased 18.43% year on year, and export volume increased 6.73% year on year.

The company actively lays out new production capacity and new products, and future space can be expected. (1) In terms of production capacity: The company has three domestic production bases in Wuxi, Chuzhou and Sanming, and an overseas production base in Thailand. It has built a total production capacity of 330,000 tons, a production capacity of 75,000 tons under construction, and a planned production capacity of 25,000 tons. The total production capacity ranks third in the world. On July 26, the company issued a convertible bond prospectus (declaration draft). It plans to issue convertible bonds for the second phase of expanding production of 25,000 tons of silica in Thailand and a comprehensive utilization project for biomass (rice husk) resources. We believe that the increase in production capacity will help the company further expand its international market share. The process of using rice husk ash to produce silica can reduce environmental pollution, conform to the concept of green development, and meet the needs of major downstream international customers. (2) Product side: As of the 2023 semi-annual report, some applications of the silica microsphere project incubated by the company have already received small commercial orders; other applications are in the process of client-side testing, and new industry application products will be launched one after another in the future.

Profit forecast and investment rating: We expect the company's operating income in 2023-2025 to reach 2,082 billion yuan, 2,503 billion yuan, and 2,503 billion yuan respectively, up 19.2%, 10.8% and 8.5% year on year, and net profit attributable to parent company shareholders to reach 451 million yuan, 526 million yuan, 620 million yuan respectively, up 18.6%, 16.7%, 17.8% year on year. The diluted EPS in 2023-2025 will reach 1.08 yuan, 1.26 yuan and 1.49 yuan respectively. The current stock price The corresponding 2023PE is 14x, maintaining the “buy” rating.

Risk factors: 1. Capacity construction falls short of expectations 2, risk of a sharp drop in downstream demand 3, risk of a sharp rise in raw material prices