Incident: The company released its 2023 annual report. In the first half of the year, it achieved revenue of 750 million yuan, -17.3% year on year, and net profit of 160 million yuan, +16.1% year on year; of these, Q2 alone achieved revenue of 380 million yuan, -17.2% year on year, and realized net profit of 84.11 million yuan, or -34.8% year on year.

Performance is under pressure in the short term, and we are waiting for downstream demand to recover. Among the company's main business products in the first half of '23, cellulose ether products achieved revenue of 55.19 million yuan, a year-on-year decrease of 1.2%, which basically remained stable. As demand in the downstream construction industry gradually recovered and demand for building materials grade cellulose ether rebounded, the consumer industry gradually recovered and demand for food-grade cellulose ether increased. It is expected that future performance of the cellulose ether business will continue to improve; the vegetable capsule business achieved revenue of 9.97 million yuan, -44.4% year-on-year. Revenue from the vegetable capsule business decreased a lot. The main reason was that downstream inventory was higher, short-term demand gradually declined, and as vegetable capsules gradually declined, Sales volume A gradual recovery is expected, and performance is expected to continue to grow.

Production capacity is gradually being released, and performance is expected to continue to grow. The company has a lot of production capacity under construction, and production capacity continues to grow. The company currently has a production capacity of 34,000 tons/year of cellulose ether, including 40,000 tons/year for pharmaceutical food grade and 30,000 tons/year for building material grade cellulose ether. Currently, the company has a production capacity of 40,000 tons/year of cellulose ether under construction, including 20,000 tons of building materials.

It is estimated that 10,000 tons/year of building material grade cellulose ether will be completed in 2023, and vegetable capsules are expected to reach 30 billion capsules in 23.

The company announced in June 2023 that the convertible bond fundraising project includes an annual output of 30,000 tons of cellulose ether and 15 billion vegetable capsules. It is expected that construction will be completed one after another in 24-25. It is estimated that in 23/24/25, the company's annual production capacity of cellulose ether will reach 49,000 tons/64,000 tons/69,000 tons, of which pharmaceutical food grade cellulose ether has an annual production capacity of 9,000 tons/14,000 tons/19,000 tons/19,000 tons; the company's annual production capacity of vegetable capsules is 30 billion capsules/35 billion capsules/40 billion capsules. The continuous release of production capacity will open up new space for the company's performance growth.

A leading cellulosic ether company with diverse products and a wide range of applications. The company was founded in 1992 and began entering the nonionic cellulose ether industry in 2000. The downstream applications of the company's main product, cellulose ether, involve the fields of building materials, pharmaceuticals, and food additives. The company has now laid out vegetable capsule business in the pharmaceutical field and artificial meat business in the food additives field. Among them, the application barriers in the field of food additives are high. The company's products have obtained multi-system certification, obtained supply certification from customers in many countries, and has a large and stable customer base at home and abroad.

Profit forecasts and investment recommendations. EPS is expected to be 0.99 yuan, 1.37 yuan, and 1.66 yuan respectively in 2023-2025, and the corresponding dynamic PE is 17 times, 12 times, and 10 times, respectively. The company's new production line was gradually put into operation in '23, production capacity was gradually released, downstream demand for the company's products gradually picked up, and the gross margin of newly built production capacity was high. The company was given 16 times PE in 24, with a target price of 21.92 yuan. It was covered for the first time, and given a “buy” rating.

Risk warning: Risks such as downstream demand falling short of expectations, sharp rise in raw material prices, and falling short of expectations in production capacity.