Incidents:
On August 26, 2023, Kaisheng New Materials released its 2023 interim report: in the first half of 2023, the company achieved operating income of 492 million yuan, a year-on-year decrease of 6.02%; realized net profit attributable to shareholders of listed companies was 103 million yuan, a year-on-year decrease of 21.51%; the weighted average return on net assets was 7.07%, down 2.99 percentage points from the previous year. The gross profit margin on sales was 37.26%, a year-on-year decrease of 0.94 percentage points; the net profit margin on sales was 20.92%, a year-on-year decrease of 4.16 percentage points.
Among them, Q2 in 2023 achieved revenue of 244 million yuan, -8.15% year on year, -1.65% month on month; realized net profit of 52 million yuan, -16.13% year on year, +3.41% month on month; ROE was 3.58%, down 1.13 percentage points year on year and 0.07 percentage points month on month. The gross profit margin on sales was 36.10%, a year-on-year decrease of 0.20 percentage points, and a year-on-year decrease of 2.30 percentage points; the net profit margin on sales was 21.44%, a year-on-year decrease of 2.08 percentage points, and a year-on-year increase of 1.04 percentage points.
Investment highlights:
Downstream demand is weak, and the company's performance in the first half of the year is under phased pressure
At 2023H1, the company achieved operating income of 492 million yuan, a year-on-year decrease of 6.02%; realized net profit attributable to shareholders of listed companies was 103 million yuan, a year-on-year decrease of 21.51%. In the first half of 2023, due to the impact of the macroeconomic cycle, the overall performance of the chemical industry was sluggish, downstream demand was weak, prices of some chemical products declined and remained low, and industry competition intensified, which posed great challenges to capacity digestion and product gross profit to a certain extent.
In addition, the increase in various expenses of 2023H1 also had a certain impact on the company's profits. The company's 2023H1 sales expenses, management expenses, and financial expenses increased by 11.72%, 30.31%, and 19.43%, respectively. Among them, changes in sales expenses are expected to be mainly due to increased sales of the company's chloroacetyl chloride, aramid polymer monomers, etc., and changes in management expenses are mainly due to an increase in the company's employee remuneration, depreciation and amortization in the first half of the year, and changes in financial expenses are expected to be mainly due to a decrease in the company's interest income. Due to the increase in R&D projects, the company's 2023H1 R&D investment increased by 41.19% year-on-year. Net cash flow from the company's 2023H1 operating activities was 95 million yuan, a year-on-year decrease of 454.76%, mainly due to a decrease in the share of cash in repayments in the first half of the year and a decrease in due collection of project payments made with bills receivable collected from purchase payments.
Looking at Q2 in a single quarter, the company achieved operating income of 244 million yuan, a decrease of 04 billion yuan over the previous quarter; realized net profit of 52 million yuan, an increase of 01 million yuan over the previous month. The overall performance of the company did not change much from month to month. Among them, 2023Q2 achieved gross profit of 88 million yuan, a month-on-month decrease of 07 billion yuan, which is expected to be mainly due to a drop in the price of sulfoxide chloride; sales expenses/management expenses/financial expenses/R&D expenses were +0.01/+0.01/-0.02/-0.02 billion yuan, respectively. The company's expenses remained stable during the period; net investment income/fair value change net income was +0.02/-01 billion yuan, respectively. It is expected that in the second half of the year, as the company's new 3,200 tons/year aramid polymer monomer project is put into operation, the contribution of 50,000 tons/year chloroacetyl chloride trial production in the first half of the year will gradually increase, the downstream agrochemical market will pick up, and the company's performance is expected to rise steadily.
There are ups and downs in various businesses. The slump in sulfoxide chloride is dragging down performance. Looking at aramid polymers, the company's main products include inorganic chemicals (including sulfoxide chloride and sulfuryl chloride), carboxyl chloride (including aramid polymeric monomers, p-nitrobenzoyl chloride, chloroacetyl chloride, etc.), hydroxychloride (including chloroether, etc.), and polyether ketone. In the first half of 2023, the company's inorganic chemicals, carboxyl chlorides, and hydroxychlorides achieved revenue of 101 million yuan, 326 million yuan, and 58 million yuan respectively, compared to -52.85%, +22.64%, and 75.22%. The gross margins were 36.65%, 40.42%, and 24.41%, respectively, and -7.88 pct, +5.06 pct, +5.77 pct.
Revenue and gross margin for inorganic chemicals, with sulfoxide chloride as the core, declined sharply year-on-year, leading to a decline in the company's 2023H1 and Q2 quarterly performance. According to Baichuan Yingfu, the average market price of sulfoxide chloride in Q1 was 1,724 yuan/ton, Q2 was 1,579 yuan/ton, Q3 was 1205 yuan/ton as of August 25, 2023, while the average prices in the Q1 and Q2 markets in 2022 were 3,534 yuan/ton and 3,274 yuan/ton, respectively. The price of sulfoxide chloride continued to drop sharply, putting pressure on the company's performance.
Corresponding to the inorganic chemicals business, the company's carboxyl chloride and hydroxychloride-related products all achieved year-on-year growth in revenue and gross margin. Among them, the company's core product, aramid polymer monomers, continued to have excellent profit levels, ensuring that the company's basic market is stable.
The new production capacity for aramid polymers is gradually being implemented, and PEKK is about to break through, driving the company's growth. According to the company's 2022 annual report, the company's aramid polymer monomer/terephthalyl chloride production capacity is under construction at 3,200 tons/year. In addition, the Weifang Kaisheng production base will build a new 20,000 tons/year aramid polymer monomer project. According to the EIA report, the company's 3,200 tons/year aramid polymer monomer construction period is 12 months, and it is expected that construction and commissioning will release an increase this year; according to the 2023 semi-annual report, construction of the company's 20,000 tons/year aramid polymer monomer project has already begun construction. By the end of June, the project progress was 9.36%, and the overall construction cycle of the project was 18 months, and is expected to be completed and put into operation in 2024.
The company's 1000 tons/year PEKK project is currently undergoing trial production and debugging of sequential products. According to the established plan, in response to the problems existing in the trial production process, the company's R&D personnel and workshop production personnel are adjusting the relevant equipment and production process. At the same time, they will simultaneously combine and reduce costs during this process. It is expected that PEKK production costs can be reduced by about 30% to 40% after completion. At the level of market development, the company's PEKK products have been sending samples to customers in various fields in small batches for verification. Currently, they have been recognized by customers in various fields such as general profiles (plates, bars, pipes), etc. As of 2023H1, the safety inspection procedures for the 1000 tons/year PEKK project have been completed. The company is in the process of carrying out the environmental inspection procedures for the project. It is expected that the environmental inspection will be completed and officially put into operation around the end of 2023.
The company's convertible bond project, 10,000 tons/year of new lithium salt for lithium batteries, was reviewed and approved by the Shenzhen Stock Exchange on June 29, 2023. In mid-May, the company stated in the research activity information that the 10,000 tons/year LiFSI project is progressing according to plan. It is expected that large-scale construction will begin at the end of the second quarter or the beginning of the third quarter of this year, and that it will be completed and put into operation within the established construction cycle. LiFSI is expected to open up space for the company to grow in the future.
The profit forecast and investment rating comprehensively consider factors such as the company's business situation in the first half of the year, product prices, new construction projects and new product market development progress, and downstream demand. We have adjusted the company's profit forecast moderately. We expect the company's net profit to be 257, 390, and 551 million yuan respectively in 2023-2025, corresponding to 34, 23, and 16 times the corresponding PE. Considering factors such as the integrated layout of the company's sulfoxide chloride industry chain, the leading position of aramid polymers, and the gradual launch of new production capacity in the future, PEKK is expected to open up incremental markets. We are still optimistic about the company's future development and performance growth, and maintain a “buy” rating.
Risks suggest a sharp decline in product prices, project commissioning progress falling short of expectations, technology development falling short of expectations, downstream demand expansion and market development falling short of expectations, large fluctuations in raw material prices, increased competition in the industry, turmoil in the international situation, and drastic changes in industry policies.