Description of the event

The company released its 2023 annual report. In the first half of the year, it achieved revenue of 850 million yuan (-4.1% year on year), net attributable profit of 190 million yuan (-4.5% year on year), and realized attributable non-net profit of 180 million yuan (-9.4% year on year). Among them, Q2 achieved revenue of 4.3 billion yuan in a single quarter (-2.4% year on year, +4.7% month on month), net attributable profit of 110 million yuan (-8.0% year on year, +28.3% month on month), after deducting non-attributable net profit of 100 million yuan (-13.7% year on year, +34.9% month on month). Q2 Revenue and performance increased month-on-month.

Incident comments

Demand is improving, and the company's Q2 sales volume has reached a record high. The company released Q2 operating data. According to calculations, the company's quarterly production of silicon dioxide products reached 73,000 tons (+19.2%, +15.9%); sales volume reached 73,000 tons (+20.1%, +12.3%); sales amount reached 4.3 million yuan (+4.5% YoY, +5.4% YoY); and the price per ton was 5885.8 yuan (-13.0% YoY, -6.2% YoY). Looking at raw material prices, Q2's soda ash purchase price rose 0.38% month on month, up 1.64% year on year; quartz sand purchase price fell 4.35% month on month, down 9.59% year on year; sulfur purchase price fell 21.02% month on month, down 63.68% year on year. From the above data, combined with the fundamental situation, it can be seen that: 1) Since 2023, the company's downstream tire industry market has gradually recovered, domestic and foreign demand has continued to increase, and the company's production and sales volume in a single quarter has reached a record high; 2) The unit price of the company's products has declined due to falling raw material prices and the price model adopted by some customers; 3) From the end of 2022 to August 2023, the company's two sodium silicate raw material lines have successively entered the overhaul stage. Production costs of raw materials have remained high, which has an adverse effect on the production cost of silicon dioxide products. As the company's production capacity continues to be released, downstream demand improves, and revenue and performance are expected to continue to increase.

The company's production capacity is expanding in an orderly manner. In 2020, the first phase of the company's Thailand project was officially put into operation, and the technical improvement production capacity of the Sanming plant in Fujian was put into operation one after another. As of 2023H1, the company had a silica production capacity of 330,000 tons/year. The company's second phase of 25,000 tons/year high dispersion silicon dioxide in Thailand has completed the preliminary local approval procedures, and construction will commence after further construction permits and other formalities; the 75,000 tons/year high dispersion silicon dioxide project production lines for the fundraising project are expected to be completed in trial production one after another in 2024, and the entire project is expected to be completed by the end of 2024. In the future, with the gradual release of production capacity, the company's market competitiveness will be enhanced.

The increase in the penetration rate of new energy vehicles continues to drive demand for white carbon black. According to data from the China Automobile Association, China sold 13.123 million vehicles in the first half of 2023, an increase of 8.8% over the previous year. Among them, from January to June 2023, production and sales of new energy vehicles completed 3.788 million units and 3.747 million units respectively, up 42.4% and 44.1% year-on-year respectively, with a market share of 28.3%. Among them, the sales volume of new energy passenger vehicles in January-June was 3.086 million units, an increase of 37.3% over the previous year. Tire rolling resistance is an important contributor to fuel consumption of fuel vehicles or the range of electric vehicles, and is also directly related to carbon dioxide emissions.

Adding white carbon black to tire rubber can improve tire performance and reduce tire rolling resistance. With the upgrading of global tire greening and the continuous introduction of global green tire policies, market demand for white carbon black is expected to rise rapidly.

Maintain a “buy” rating. The company is the largest supplier of precipitated silica in Asia and the third largest in the world. The company's industrial chain extends upstream and downstream, and has now built a complete industrial chain from the raw materials sulfuric acid and sodium silicate to the final product, silica. As the global tire greening rate continues to grow and the company's own production capacity is released, performance is expected to develop rapidly. The company's net profit for 2023-2025 is estimated to be $400 million, $5.0 billion and $60 billion respectively.

Risk warning

1. The investment in new production capacity fell short of expectations;

2. Downstream demand is weak;

3. Fluctuations in raw material prices.