The silane boom has declined, and the company's performance is under pressure. The aerogel project is progressing well, and the company is expected to reduce costs and gain a competitive advantage with its complete industrial chain advantages. Considering the significant decline in the prosperity of the functional silane industry compared to 2021-2022, we lowered the company's net profit forecast for 2023-2025 to 180, 441, and 628 million yuan. We believe that the company's aerogel is expected to contribute to performance in 2024, give the company 15 times PE in 2024, lower the target price to 21 yuan, and maintain the “buy” rating.

The popularity of functional silanes declined, and the company's 2023Q2 performance continued to decline month-on-month. In the first half of 2023, the company achieved operating income and net profit of 570 million yuan and 70 million yuan respectively, compared with -48% and -83% year-on-year. Looking at a single quarter, 2023Q2 achieved operating income and net profit of RMB 280 million and 0.3 billion yuan respectively, compared with -50% and -86% year-on-year. The prosperity of the functional silane industry has gradually declined since 2022H2, industry competition has intensified, demand has weakened, the company's gross margin has continued to decline in a single quarter, and performance continues to be under pressure.

We expect that the boom in functional silanes may be at the bottom, and is expected to pick up as the economy recovers. According to Baichuan Yingfu data, the price of functional silane in 2021-2022 was at an all-time high. As the industry sentiment declined, the current price range has fallen back to a historically low level in 2018-2020. The month-on-month decline in the company's 23Q2 silane sales price has narrowed compared to 23Q1. Prices of raw materials such as silicon powder, propylene chloride, and ethanol have fluctuated less from month to month. According to Baichuan Yingfu data, the market prices of the main silanes KH-550, KH-560, and KH-570 have all increased recently. We believe that the price range of the silane industry is close to the bottom of the industry, and there is limited room for profitability to decline.

The main downstream end application areas of silane are tires and real estate related industries. As the economy gradually recovers, the prosperity of the functional silane industry is expected to pick up.

The company's aerogel project is progressing well and is expected to gain a competitive advantage through low cost. The company has many aerogel production capacity plans. According to the company announcement, the 2,000-ton aerogel project is already in trial production. The company has a hydrogen chloride cycle and an ethanol cycle, and fully relies on silane production lines to achieve low-cost aerogel production. The company plans that the total production capacity of aerogels will reach 77,000 tons. Production capacity is being actively promoted. After sample delivery, verification and market development, the company's aerogels are expected to contribute steadily to performance in 2024, becoming the second growth point of the company's development.

Risk factors: downstream demand falls short of expectations; raw material prices fluctuate sharply; construction of additional silane and aerogel production capacity falls short of expectations; downstream aerogel verification progress falls short of expectations.

Profit forecast, valuation and rating: Considering the significant decline in the prosperity of the functional silane industry compared to 2021-2022, we lowered the company's net profit forecast for 2023-2025 to 180, 4.41 million yuan, and 628 million yuan (the original forecast was 350, 5.86 million yuan, and 785 million yuan), corresponding to the 2023-2025 EPS forecast of 0.58, 1.41, and 2.01 yuan respectively. Considering that aerogel is expected to become the company's second growth point and contribute significantly to performance in 2024, the functional silane and aerogel industry is comparable to company valuations (Wind unanimously expects the average PE of Hongbai New Materials, Pan-Asia Microtransmission, and Silicon Bao Technology to be 15 times higher in 2024), giving the company 15 times PE in 2024, lowering the target price to 21 yuan (the original target price was 37 yuan, the company's share capital change in June 2023), and maintain the “buy” rating.