Company announcement: according to the company announcement, the income in the first half of the year is 1.664 billion yuan (YoY-8.67%), the return net profit is 209 million yuan (YoY-27.67%), and the non-return net profit is 201 million yuan (YoY-29.74%). The performance is in line with expectations. Among them, 23Q2 realized income of 853 million yuan (YoY-11.72%,QoQ+5.28%), net profit of 121 million yuan (YoY-31.26%, QoQ+36.59%) and net profit of 116 million yuan (YoY-33.07%,QoQ+35.05%). The improvement of Q2 income and profit quarter-on-quarter was mainly due to the rebound of sales of auxiliaries and changes in product structure.

Q1 was affected by the later stage of the epidemic, the sales volume declined, and the prices of products such as anti-coking agents and accelerators were adjusted back along with the raw materials in the later stage, which affected the gross profit margin as a whole. In the first quarter, due to the impact of the later stage of the epidemic, the company's rubber auxiliaries sales were lower than expected, so Q1 sales declined. In the second quarter, the overall demand for downstream tires is good, and sales have rebounded, but due to the continuous decline in raw material prices, the prices of different varieties of rubber auxiliaries are under pressure. According to the company announcement, the company's leading product anti-coke agent CTP accounts for more than 60% of the global market share, and the price in the first half of the year fell slightly with the raw materials, but the profit per ton was maintained; according to Wind data, the price of aniline in the upstream of the accelerator fell 6.17% in the first half compared with the same period last year, which made the price of accelerator decline somewhat, and the competition of superimposed accelerator was more fierce, so the profit was slightly damaged compared with the same period last year. The price of insoluble sulfur is affected by liquid sulfur, the profit of intermittent method is relatively under pressure, and the continuous process of the company has relative advantages, and the profit is better than that of intermittent method. Overall, the company's first-half gross profit margin fell 2.41pct to 26.18% compared with the same period last year. On the cost side, mainly for the increase in R & D costs, the company actively carried out R & D of auxiliaries and new products in the first half of the year, resulting in an increase of 10.98 million yuan in R & D infrastructure investment in the first half of the year compared with the same period last year. In addition, the credit impairment loss of notes receivable and accounts receivable was nearly 20 million yuan in the first half of the year. Overall, first-half net profit margins fell 3.31pct to 12.58 per cent year-on-year.

The demand for Q2 rubber auxiliaries is good, the sales volume picks up, and the profit of each product stabilizes. According to the company's report, the demand for downstream tires was strong in the second quarter, and the company's demand for rubber auxiliaries was good, supporting the gradual stabilization of the profits of some products, and the anti-coking agents maintained a high profit state, making the Q2 gross profit margin rebounded to 27.08% from the previous quarter. The main changes on the expense side come from the increase in R & D expenses and the increase in exchange gains among financial expenses. According to the income statement, it is estimated that the exchange gains of Q2 exceed 30 million yuan compared with Q1. In addition, the credit impairment losses of accounts receivable and notes receivable have increased by more than 15 million yuan, which makes the net profit margin increase to 14.16%.

Increased production capacity of existing products and products under development drive future growth. According to the company's report, by the end of June 2023, the project under construction of the company has increased by 173 million yuan to 299 million yuan compared with the beginning of the year. The main projects include an annual output of 90,000 tons of rubber auxiliaries and 10,000 tons of rubber anti-coke agent CTP production equipment. The progress of the project is 38.79% and 31.26% respectively. It is expected that about 3000 tons of anti-coke agent will be added in the later stage, and about 40,000 tons of amino resin will be added in the adhesive system. The company will continue to strengthen the transformation of new auxiliaries from small-scale testing to industrialization, in order to meet the requirements of downstream tire industry for performance improvement and formula optimization, and plans to produce 65000 tons of high-performance rubber auxiliaries and by-product recycling projects per year, including 55000 tons of silane coupling agents and 10,000 tons of by-products propyltrichlorosilane and silicon tetrachloride, which are expected to be gradually put into production in 2024. In addition, organic peroxides and other auxiliaries are scheduled to build a pilot production demonstration line at the end of 2024.

In addition, the company conducts laboratory research on lithium electricity new energy-related additives, and is expected to complete pilot trials of vinyl carbonate and fluoroethylene carbonate in 2023, as well as layout of the antioxidant lipoic acid in the large health field, and gradually release production capacity in 2023. We believe that in the case of the gradual weakening of the cyclical fluctuation of the profits of traditional auxiliaries, we need to pay more attention to the transformation of the company's achievements in new products, which will achieve multi-point flowering in the future.

Profit forecast and valuation: considering the decline in product prices, the profit forecast for 2023-2025 has been lowered. It is estimated that the three-year net profit will be about 5.2,5.9 and 650 million yuan (the original forecast is 5.7,6.3 and 700 million yuan), corresponding to about 8, 7 and 6 times of PE. With reference to the 23-year average PE of Hailide and Quancheng shares in the upstream of tires, it is about 15 times (Wind consensus) to maintain the "buy" rating.

Risk tips: production of projects under construction falls short of expectations; sales of new products fall short of expectations; large fluctuations in raw materials affect profitability