Our view: Dongyue Group is a leader in the fluorosilicon industry in China. Fluorine chemicals (hydrofluoric acid+refrigerant+fluorinated polymer materials) and silicon chemicals (monomers+intermediates+deep-processing products) have remarkable advantages; the overall supply and demand of second-generation refrigerants have improved; the average price of PVDF, R142b, and silicone markets has declined, and the company's profit is expected to decline in 2023H1. It is expected that 2023H2 will still have some profit pressure, but there is still room for long-term development. As of the close of trading on September 7, 2023, the company's stock prices corresponding to PE TTM and PB MRQ were 5.5x and 0.92x respectively. Investors are advised to pay attention.
2023H1 Profit declined: 2023H1, the company's revenue, gross profit, and net profit were 71.98, 11.32, and 207 million yuan, respectively, -28.8%, -69.6%, and -89.4% year-on-year; gross profit margin was 15.7%, -21.1 pcts, year-on-year. The decline in performance was due to a sharp year-on-year drop in the prices of major products, and the increase in product sales volume and changes in raw material prices during the same period were insufficient to make up for the impact of the decline in product market prices on profits.
Fluorinated polymer materials: PVDF prices have dropped significantly. Dongyue's polymer materials include PTFE, PVDF, HFP, FEP, and FKM. The current annual production capacity is 5.5, 25,100, 10,000, and 30,000 tons, respectively. The production capacity advantage is remarkable, and it is self-sufficient in raw materials such as R142b and R22. 2023H1, the company's revenue from fluorinated polymer materials was -31.5% year-on-year to 2,275 million yuan, revenue accounted for 31.6%, segment profit ratio -80.5% to 224 million yuan, segment operating profit margin -24.7 pcts to 9.9% year on year; mainly due to falling product prices, production and sales growth did not make up for the negative impact of falling prices; among them, demand for lithium batteries in 2022 drove a sharp rise in the average price of PVDF. Industry capacity expansion and weak downstream demand led to a sharp decline in 2023H1 PVDF prices and profit margins.
Refrigerant: R22 lead, improved supply and demand pattern. Dongyue is the leading refrigerant in China. Currently, the second-generation refrigerant R22 has an annual production capacity of 280,000 tons, ranking first; R142b has a production capacity of 30,000 tons and an export quota of 13,000 tons. The rest is used for internal production of PVDF, FKM, etc. According to the Ministry of Ecology and Environment, the R22 quota was cut by 19% in 2023, supply was reduced, demand was better, and the supply and demand pattern improved. 2020-2022 is the benchmark year for third-generation refrigerant quotas. Currently, Dongyue R32 and R125 each have an annual production capacity of 60,000 tons. 2023H1, the company's refrigerant revenue was -30.4% year-on-year to 1,453 million yuan, revenue accounting for 20.2%, segment profit was -52.5% year-on-year to 168 million yuan, and the division operating profit margin was -5.4 pcts to 11.6% year-on-year. Affected by changes in demand in the PVDF industry chain and industry expansion, the price of R142b fell sharply during the period; therefore, although demand in the refrigerant market was good during the period and prices of products such as R22, R32, and R410a rose, it failed to make up for the negative impact of the decline in R142b prices on the performance of the refrigerant segment.
Silicone: There is some profit pressure. The company's silicone business is produced by its subsidiary Dongyue Silicon. It uses silicon powder and its own methylene chloride to produce silicon monomers, and processes silicon monomers into silicon intermediates (mainly DMC). Some of these intermediates are self-supplied for the production of silicone rubber and other silicones. Currently, the monomer has an annual production capacity of 600,000 tons. 2023H1, the company's silicone revenue was -27.5% year-on-year, accounting for 34.8% of revenue, division operating loss of 222 million yuan (profit of 637 million yuan for the same period last year), and segment operating profit margin -27.3 pcts to -8.9% year on year; mainly due to weak downstream demand for silicone, overall supply exceeding demand, prices fell to a low level.
Risk warning: Product and raw material price fluctuations, industry overcapacity, company operating risks.