Key points of investment:

Company announcement: According to the company announcement, the company achieved revenue of 750 million yuan (YoY -17.3%) in the first half of the year, realized net profit of 157 million yuan (YoY -30.4%), and achieved net profit of 148 million yuan (YoY -29.5%) after deducting non-attributable net profit of 148 million yuan (YoY -29.5%). The performance was in line with expectations.

Among them, 23Q2 achieved revenue of 375 million yuan (YoY -27.2%, basically flat from month to month), realized net profit of 8.411 million yuan (YoY -34.8%, QoQ +15.5%), realized net profit of 88.28 million yuan (YoY -31.1%, QoQ +27.1%), and non-recurring losses in the second quarter were transactional financial debt losses exceeding 7 million yuan. The month-on-month improvement in the second quarter was mainly due to an increase in sales of vegetable capsules and cellulose ether.

In the first half of the year, the price of cellulose ether declined somewhat due to the price of raw materials, and sales of vegetable capsules declined due to demand and inventory, which affected overall profitability. According to the company's interim report, cellulosic ether revenue for the first half of the year was 552 million yuan (YoY -1.2%), mainly due to the decline in the prices of refined cotton, propane oxide, and methylene chloride raw materials in the first half of the year, which led to a decline in the price of cellulose ether, but sales volume rose due to increased production capacity and a steady increase in the company's downstream customer orders. In the first half of the year, vegetable capsule revenue was 99.67 million yuan (YoY -44.4%). Mainly due to the high shipping pressure last year and the impact of the epidemic, some downstream customers were worried that the supply of products could not be stable, so they stocked up on vegetable capsules in advance, so the second half of last year was in the dewarehousing stage. Furthermore, due to an increase in production by peers, the company's capsule sales and prices began to decline in the second half of last year, but since this year, sales volume has gradually stabilized, and has rebounded from quarter to quarter. Overall, however, gross margin fell 6.38 pct to 31.22% year-on-year in the first half of the year. On the cost side, in the first half of the year, the company's sales expenses rate, management expenses rate, and R&D expenses rate fell 0.3 pct year on year. This was mainly due to the decline in management expenses. This was mainly due to the company's related expenses reported to management expenses during the maintenance period in the same period last year. Financial expenses were 25.76 million yuan, which led to a year-on-year decline in net profit margin of 3.92 pct to 20.91%.

Q2 Profit has improved, driven by a recovery in plant capsule production capacity utilization and sales volume. According to Baichuan data, the prices of cellulose ether raw materials cotton pulp meal, propane oxide, and methylene chloride fell by 3%, 1.2%, and 1.3%, respectively, from month to month in the second quarter, causing the price of cellulose ether to drop somewhat, which affected the gross profit margin of cellulose ether. However, sales of vegetable capsules rebounded in the second quarter due to the gradual digestion of downstream stocks and the gradual stabilization of the supply pattern. Overall, Q2 gross margin rebounded slightly by 0.44pct to 31.44% month-on-month. On the cost side, the overall sales expense ratio, management cost rate, and R&D expense ratio increased slightly by 0.27 pct over month. Among them, the R&D expense ratio increased by 0.43 pct. Among financial expenses, the estimated exchange gain was about 16 million yuan, resulting in a net profit margin of 3 pct to 22.41% month-on-month.

As of the end of June 2023, the contribution to the gradual consolidation of cellulose ether projects was increasing. As of the end of June 2023, according to the company's interim report, the company's fixed assets and projects under construction were about 1,498 million yuan and 764 million yuan respectively, a change of +696 million yuan and -648 million yuan respectively from the beginning of the year. The main phase of the project included 40,000 tons/year cellulose ether project (phase I). The first phase of the project included 20,000 tons of building-grade cellulose ether and 10,000 tons of food and pharmaceutical-grade cellulose ether. The project progress was about 90.2%. Capsule sales are expected to pick up quarterly thereafter. With the gradual digestion of inventories and the recovery of terminal health product consumption, the company's vegetable capsule sales are expected to rise quarterly. We expect Q3 to 4 to 5 billion capsules.

Profit forecast and investment rating: Considering that the short-term price of cellulose ether has declined, the sales volume of vegetable capsules is on the rise, and that the restructuring of projects under construction has brought about the calculation of related costs and expenses, and lowered the profit forecast, it is estimated that the net profit for 2023-2025 will be about 3.4, 4.1, and 480 million yuan (original forecast of 3.7, 4.2 billion yuan, 5.1 billion yuan), corresponding PE to 17, 15, and 12 times, maintaining the “increase in holding” rating.

Risk warning: Downstream production capacity of cellulose ether falls short of expectations; vegetable capsule pattern deteriorates; large fluctuations in raw materials affect profit levels