In the first half of 2023, product structure optimization combined with the gradual release of production capacity for new construction projects led to a slight increase in the company's revenue; product structure optimization combined with a decrease in raw material costs, net profit grew faster than revenue. Looking ahead to the second half of the year, revenue growth is expected to remain steady, and the growth rate is expected to be better than in the first half of the year; at the same time, comprehensive gross margin is expected to pick up, driving the company's profitability to rise. Reiterating: As a manufacturer with deep technical reserves, leading base film production capacity, and an integrated industrial chain, the company's future growth momentum will mainly come from the release of film capacitor production capacity and the increase in the price of ultra-thin PP film due to the widening supply and demand gap, etc., maintaining the company's net profit forecast of 119/1.66/192 million yuan for 2023/24/25, maintaining a target price of 89 yuan, and maintaining a “buy” rating.

Business Overview: The company released its 2023 semi-annual report. During the reporting period, it achieved revenue of 537 million yuan, an increase of 5.38% over the previous year; realized net profit of 43 million yuan, an increase of 8.09% over the previous year, equivalent to EPS of 0.08 yuan; achieved non-net profit of 42 million yuan, an increase of 15.91% over the previous year. According to our estimates, in the second quarter, the company achieved revenue of 276 million yuan, an increase of 2.20% over the previous year; realized net profit of 20 million yuan, an increase of 10.39% over the previous year; and achieved non-net profit of 21 million yuan, an increase of 18.76% over the previous year.

The optimization of the product structure combined with the gradual release of production capacity for new construction projects has driven a slight increase in the company's revenue. In December 2022, after the epidemic prevention policy was liberalized, although the domestic concentration peak was too high, there were still differences between regions. In addition, as spring approached, the production and sales of some of the company's products, such as crystal devices, mobile phone connectors, and recycled resins, were affected to a certain extent. In this context, the company's revenue continued to grow slightly in the first half of 2023, mainly due to: 1) Product structure optimization — In the past two years, demand was driven by new conditions, limited by equipment, capacity expansion was limited, and the price of ultra-thin PP film rose markedly. In order to meet market demand, the company increased its share of ultra-thin PP film production, driving a slight increase in revenue; 2) Release of new production capacity: After the controlling shareholder changed hands, production capacity for newly built projects, such as capacitor projects for new energy vehicles, was gradually released (capacitor revenue increased by about 22.76% year-on-year), driving overall revenue growth. Looking ahead to the second half of 2023, along with the release of production capacity for new construction projects over the past two years, etc., it is expected that the company's revenue growth will remain steady throughout the year, and that the growth rate may be better than in the first half of the year.

Product structure optimization combined with lower raw material costs, net profit is growing faster than revenue. In the first half of 2023, although the decline in profitability of some products, such as crystal devices and recycled resins, dragged down the gross profit margin, the company's gross margin still increased slightly compared to the same period last year and 2023Q1, and the net profit growth rate was faster than revenue growth, mainly due to: 1. Product structure optimization: ① After product structure adjustments in the past two years, the proportion of ultra-thin PP film with higher profitability has increased; ② Along with the release of new production capacity, the increase in the share of capacitors used in more profitable new energy vehicles has led to a significant increase in gross margin of capacitors (gross profit margin in the first half of 2023 was 26.32%, an increase of about 7.76 pcts over the same period last year); 2. Raw material costs for some products have declined: Raw material costs for some of the company's products have dropped markedly, such as connectors. The reduction in operating costs was significantly higher than operating income, driving a recovery in gross margin.

Looking ahead to the second half of the year, we anticipate that with the restructuring of capacitor products (increasing share of film capacitors for new energy with higher profitability) and a recovery in demand for traditional products and a recovery in profit, etc., the company's overall gross margin margin is still expected to increase, thus driving the company's profitability back up.

Risk factors: macroeconomic fluctuations or impact operations; increased competition or a decline in profitability; large fluctuations in raw materials affect profitability; penetration rate of PP composite copper foil falls short of expectations; there is a risk of inventory impairment.

Profit forecast, valuation and rating: The company's future growth will mainly be driven by the release of production capacity and the widening gap between supply and demand, opening up room for price increases for ultra-thin PP films: 1) After the equity structure was adjusted in 2020, the company has successively expanded or built a number of new thin film capacitor projects. Currently, these projects have entered or are about to enter the harvest period; 2) Currently, there is a tight balance between supply and demand for ultra-thin PP film. As the industrialization of PP composite copper foil continues to advance, etc., we anticipate that the gap between supply and demand will widen further in the future. As a manufacturer with the leading production capacity of ultra-thin PP film, it is expected that the company will take the lead in benefiting. Maintain the company's net profit forecast of 119/166/192 million yuan for 2023/24/25, consider next year's large-scale release of composite copper foil, the company's own scarcity (there are few PP substrates, and the company is the manufacturer with the fastest improvement and largest production capacity among listed companies), etc., give PEG 1.2X (corresponding to the compound growth rate of net profit for the next three years), maintain the target price of 8.9 yuan, and maintain the “buy” rating.