Description of the event

On August 28, Shandong Heda released its semi-annual report for 2023. In the first half of 2023, it achieved operating income of 750 million yuan, a year-on-year decrease of 17.30%, and realized net profit of 158 million yuan after deducting non-attributable income of 158 million yuan, a year-on-year decrease of 29.47%.

Looking at a single quarter, Q2 in 2023 achieved net profit of 84 million yuan, an increase of 15.53% over the previous year and a year-on-year decrease of 34.80%. In 2023, Q2 achieved non-attributable net profit of 88 million yuan, an increase of 27.08% over the previous year and a year-on-year decrease of 31.11%.

The real estate consumption chain recovered, and the company's performance in the second quarter exceeded expectations

The real estate policy improved marginally, and was repaired sequentially in the second quarter. In Q2 2023, the company achieved revenue of 375 million yuan in a single quarter, down 27.19% year on year and 0.10% month on month; realized net profit of 84 million yuan, down 34.80% year on year, up 15.53% month on month; net profit after deducting non-return net profit of 88 million yuan, down 31.11% year on year and 27.08% month on month. The company's performance in the second quarter exceeded expectations mainly due to the recovery of the real estate consumption chain. Overseas, construction of new homes in the US in June and construction permits were 1,434 and 1.44 million units respectively. The 2Q23 data showed a slight recovery from 1Q23. The company's cellulose ether had a long-term cost advantage, limited supply-side additions, limited supply-side additions, and cellulosic ether products took the lead in benefiting, and exports recovered in the second quarter. Recently, at home, the government has repeatedly released signals to promote consumption and stabilize the economy. With policies introduced one after another, it is expected that the prosperity of the domestic real estate chain will be repaired. Cellulose ether operates at a low cost, and the company flexibly lowers the price of cellulose ether according to cost, which is expected to further drive a gradual recovery in demand.

Cellulose ether production continues to expand, stabilizing the leading position in the industry

The company is a leading cellulose ether enterprise in Asia. The company's main cellulose ether products include building material grade cellulose ether (HPMC, HEMC), pharmaceutical grade cellulose ether (HPMC) and food grade cellulose ether (HPMC). The technical indicators of the company's middle and high-end building material grade cellulose ether have reached similar product standards of internationally renowned enterprises, and the product quality of pharmaceutical food grade cellulose ether HPMC has met the relevant requirements of the Chinese Pharmacopoeia, the American Pharmacopeia, the British Pharmacopeia, the Indian Pharmacopeia, and national food safety standards. The company's new production capacity of 30,000 tons of cellulose ether has basically been completed. The current production capacity is 64,000 tons. With the original production capacity being fully produced and sold in the first half of the year, the new production capacity is expected to be gradually released in the second half of the year. The expansion of production capacity, combined with the excellent quality of our own products, is conducive to accelerating the domestic substitution process and stabilizing our leading position.

The advantages of plant-based capsule integration are remarkable. The second-generation capsule accelerated replacement process is the only enterprise in the world that has an integrated HPMC-vegetable capsule industry chain. Pharmaceutical-grade HPMC is the main raw material for the production of HPMC vegetable capsules, accounting for more than 90% of the raw materials for HPMC vegetable capsules. The company has the ability to independently produce pharmaceutical-grade HPMC, and has a significant integration advantage over overseas rivals. The plant-based capsule industry quickly emerged after a cold winter. Currently, the competitive pattern is improving. The company currently has a production capacity of 27.7 billion capsules. Currently, the market share in the vegetable capsule sector is about 10%. The production capacity is 7.3 billion capsules under construction, and plans to expand production capacity to 50 billion capsules by 2025. At the same time, the company is actively developing second-generation vegetable capsules. Its technical barriers are far higher than the threshold for converting gelatin into vegetable capsules, and it is expected to accelerate the process of replacing gelatin capsules. The company uses its integration advantages to continue to expand high-value-added products, and is expected to open up room for profit growth in the future.

Investment advice

The company's net profit for 2023-2025 is estimated to be 381, 477 and 668 million yuan respectively, with year-on-year growth rates of 7.8%, 25.2%, and 40.0%. The corresponding PE is 15, 12, and 8 times, respectively. Give it a “buy” rating.

Risk warning

(1) The project commissioning progress fell short of expectations;

(2) Prices of raw materials fluctuate greatly;

(3) the risk of related policy changes;

(4) International trade risks.