Poor downstream demand has put pressure on the company's operations. The company has perfected the cellulose ether product line through acquisitions, and it is expected that growth in performance will arrive next year. Considering weak downstream demand, we lowered the company's net profit forecast for 2023-2025 to 3.52/457/615 million yuan, corresponding to the EPS forecast of 1.03/1.34/1.80 yuan.

Referring to the company's historical valuation level, the company was given 19 times PE in 2023 (corresponding to 5% valuation fraction), corresponding to a target price of 20 yuan, and maintained a “buy” rating.

2023H1's net profit was -30.36% year-on-year, and weak downstream demand put pressure on the company's operations. In 2023H1, the company achieved revenue of 750 million yuan, -17.30% year-on-year; realized net profit/net profit of non-attributable net profit of 157/158 million yuan, -30.36%/-29.47% of the same period. Performance pressure was mainly affected by poor downstream demand.

Based on the company's interim report data, we estimated that in 2023Q2, the company achieved revenue of 375 million yuan, -27.19%, and +0.10% month-on-month; realized net profit of 84 million yuan, -34.80% year-on-year, +15.53% month-on-month. The month-on-month increase in performance was mainly due to the contribution of exchange earnings. By product, the company's revenue from 2023H1 cellulose ether/vegetable capsules was 5.52/100 million yuan, respectively, -1.20%/-44.41% over the same period.

Profitability has declined, and raw material prices have steadily rebounded. The company's gross margin for 2023H1 was 31.22%, a year-on-year decrease of 6.4 pcts. The reasons include an increase in unit costs due to a decrease in capacity utilization, a decrease in the share of revenue from vegetable capsules with higher gross margin, and expenses related to the maintenance period that were included in management expenses in the same period last year and included in the accounting of operating costs in the current period. In terms of raw materials, according to the China Cotton Information Network, the market price of cotton staple wool has fluctuated at a low level since the beginning of 2023, and has rebounded in June, forming some support for the company's product prices.

Acquire Zhongfu Zhiwei to improve the cellulose ether product line. According to the company's announcement, on August 28, 2023, the board of directors agreed to sign a “share transfer agreement” with Huali New Materials, Ma Lei, Wang Shuchang, and Ma Zhiyuan. The company used its own funds to purchase 47.0796% of the shares held by Huali New Materials and Ma Lei, and made continuous profits in Phase 2 (2023 and 2024), with net profit of not less than 20 million yuan in 2023 and net profit of not less than 40 million yuan in 2024. Zhongfu Zhiwei is a national high-tech enterprise and a “specialized and new” small and medium-sized enterprise in Shandong Province. Its main product is hydroxyethyl cellulose (HEC). The HEC production capacity has reached 10,000 tons/year, ranking among the highest in the country. The company's acquisition of shares in Zhongfu Zhiwei is conducive to improving the cellulose ether product line, improving the supporting capacity of cellulose ether series products, speeding up the industrial layout, and enhancing the company's overall competitive strength and overall profitability.

Risk factors: The release of the company's production capacity falls short of expectations; demand for cellulose ether and vegetable capsules falls short of expectations; raw material prices fluctuate greatly; industry competition is intensifying.

Profit forecast, valuation and rating: Considering weak downstream demand, we lowered the company's net profit forecast for 2023-2025 to 3.52/4.57/615 million yuan (the original forecast was 471/6.34/838 million yuan), corresponding to the EPS forecast of 1.03/1.34/1.80 billion yuan. Referring to the company's historical valuation level (average PE over the past 3 years is about 38 times), the company was given 19 times PE in 2023 (corresponding to a 5% valuation score), corresponding to a target price of 20 yuan, and maintained a “buy” rating.