1H23 performance fell short of market expectations
The company announced results for the first half of 2023: operating income of 7.219 billion yuan (YoY -20.4%), net profit of 792 million yuan (YoY -44.4%), net profit of non-attributable net profit of 812 million yuan (YoY -29.9%).
In a single quarter, 2Q23, the company achieved operating income of 3.47 billion yuan (YoY -24.0%, QoQ -7.4%); net profit of 449 million yuan (YoY -53.0%, QoQ +30.6%), after deducting net income of 586 million yuan (YoY -3.2%, QoQ +158.4%). 1H23's gross margin was 25.7% (yoy-4.9 pcts), and net margin was 11.0% (yoy-4.7 pcts). 1H23 dye/additives/intermediates achieved revenue of 38.5/4.6/1.52 billion yuan (YOY-20.8/-11.6/ -25.9%), gross margin of 27.1/21.8/ 36.3% (YOY-5.5/-4.0/-6.2 ppt), sales volume of 11.0/2.8/43,000 tons (YOY-11.7/-15.7/ +1.3%), respectively, with an average sales price of 3.5/1.7/35,000 yuan/ton (YOY-10.3/+4.8/-26.8) %).
The company's non-net profit after deducting it improved markedly month-on-month in the second quarter. The average price of dye sales rebounded from month to month, and raw material prices continued to decline, but we believe demand in the dye industry is still yet to warm up, and dye profits may continue to be under pressure.
Development trends
Domestic and foreign dye revenues have declined. Judging from the situation of subsidiaries, Zhejiang Longsheng Dye Chemical Co., Ltd.'s 1H23 revenue was 19.01 billion yuan (YoY -38.4%), and net profit was 71.37 million yuan, turning a loss into a profit over the previous year.
Shengda International Capital Co., Ltd. (major shareholder of Dstar) 1H23 had revenue of 2.79 billion yuan (YoY -25.7%) and net profit of 99 million yuan (YoY -57.3%). The international environment is becoming increasingly complex, the domestic dye supply side has clearly increased, and the internal and external supply and demand pattern of the dye industry may continue to be under pressure.
The operating rate of downstream looms has increased. According to data from Longzhong News, as of August 24, the overall operating rate of chemical fiber weaving in Jiangsu and Zhejiang was 64.28%, up 1.4 ppt from the end of June. The traditional peak season for downstream printing and dyeing cloth companies is approaching. Domestic demand for dyes may be warming, but external demand is still weak. According to data from the General Administration of Customs, the export volume of disperse dyes in July 2023 was 6796 tons (YoY -31.0%, MoM -23.7%), and the export volume of the intermediate resorcinol was 504 tons (YoY -45.7%, MoM -8.2%), and demand is still yet to pick up.
The actual growth in the intermediates market is limited, and the real estate business is progressing smoothly. The company's main dye business continues to take advantage of industry leadership and cost advantages in fierce competition. Currently, although there are new entrants to the intermediates business, there has been no significant change in the market competition pattern. The Huaxing New Town project successfully completed the foundation floor pouring, the Fuxinli high-rise apartment license was successfully obtained, and Fuxinhui's investment promotion work continues to advance.
Profit forecasting and valuation
Demand in the dye industry has yet to warm up. We lowered our 2023/2024 net profit forecast by 28.3/ 28.7% to 2176/2,358 billion yuan. The current stock price corresponds to the price-earnings ratio of 13.9/12.8 times 2023/2024. The advantages of integrating upstream and downstream of the company's dye business are obvious. The real estate business may gradually enter a harvest period. We lowered our target price by 12.3% to 10.70 yuan, corresponding to a price-earnings ratio of 16.0/14.8 times in 2023/2024, maintaining an outperforming industry rating. There is room for an increase of 15.1% compared to the current stock price.
risks
Demand for dyes fell short of expectations, production capacity for dye/intermediates expanded drastically, and there is a risk that the market will decline sharply.