Main points of investment:

The company released the third quarterly report for 2023, and the performance met expectations. Company 1-3Q Realized operating income of 2.609 billion yuan in 2023 (yoy-30.76%), net profit attributable to mother is 238 million yuan (yoy-48.45%), net profit of 170 million yuan after deduction of non-profit (yoy-60.94%), 1-3Q In 2023, the overall gross profit margin of sales decreased by 5pct to 12.42% year-on-year, and the sales expenses decreased by 13.36% year-on-year to RMB 42 million yuan, mainly due to the decrease of current income, commission, tank fee and other expenses, and the financial expenses were-184 million yuan.(-148 million yuan for the same period last year), of which interest income was 163 million yuan (49 million yuan for the same period last year), and the performance met expectations. Among them, 3Q23 achieved revenue of 873 million yuan in a single quarter (yoy-27.23%, QoQ-8.97%), net profit attributable to parent was 108 million yuan (yoy-7.97%, QoQ-1.27%), net profit of 44 million yuan after deduction of non-profit (yoy-62.05%, QoQ-57.69%). The gross profit margin of 3Q23 increased by 3.06pct year-on-year and decreased by 0.97pct to 12.88% month-on-month. The interest income in the single quarter of 3Q23 was RMB 108 million yuan (including RMB 84 million yuan of non-financial enterprise capital occupation fee included in current profit and loss).

1-3Q The main reasons for the decline in net profit attributable to the parent company in 2023 were: the prices and export volume of fluorinated refrigerants, fluorinated blowing agents and hydrogen fluoride decreased year-on-year, especially the price and profit of 142b decreased significantly year-on-year. The main reasons for the month-on-month decline in net profit of 3Q23 in a single quarter are: 1. Affected by the light and peak season, the export volume and price of fluorinated refrigerant decreased month-on-month;2. The export volume and price of fluorinated foaming agent decreased month-on-month.

3Q23 was affected by the off-season, the company's export volume and price of fluorinated refrigerants declined month-on-month, while the sales volume of fluorinated foaming agents declined due to the overall reduction of quotas at the beginning of the year. 3Q23 was affected by the low season of refrigerant, sales volume decreased month-on-month, price and spread also decreased month-on-month. The production quota of fluorine blowing agent R141b this year decreased by 13469 tons compared with 2022, so the external sales volume decreased. According to the operating data of the company's third quarterly report, the company's fluorine refrigerant in the single quarter of 3Q23 (Including 142b), fluorine blowing agent and hydrogen fluoride export volume of 34,900 tons respectively (yoy-18.3%, QoQ-8.1%), 0.17 million tons (yoy-67.3%, QoQ-17.0%), 20,900 tons (yoy-1.4%, QoQ+5.6%), the average price excluding tax is 19355 yuan/ton (yoy-18.3%, QoQ-8.1%), 20043 yuan/ton (yoy+12.7%, QoQ-13.7%), 7030 yuan/ton (yoy-9.38%, QoQ-2.58%) respectively. According to the refrigerant product data of Baichuan Yingfu and Zhuochuang Information, we estimate that the price difference of 3Q23 mainstream third-generation refrigerants R32, R134a and R125 decreased by 18.1%, 10.0% and 3.0% to 1125, 5241 and 6551 yuan/ton respectively compared with 2Q23. Entering 4Q23, the rising price of fluorite, a raw material, drove up the prices of hydrofluoric acid and refrigerant. According to the quotation of Baichuan Information, the prices of R32, R134a and R125, the mainstream varieties of third-generation refrigerant, rose by 18.8%, 18.6% and 16.8% respectively to 16750, 26500 and 26000 yuan/ton compared with the average price of 3Q23. In recent years, the historical highest prices of the three are 32000, 50000 and 84000 yuan/ton respectively. With the release of new PVDF and supporting raw material 142b capacity of each enterprise, the price of 142b has continued to fall since the high point of 1Q22, and the profit has continued to decline sharply. According to the refrigerant product data of Baichuan Yingfu, the average price of 142b in 3Q23 dropped by 85% and 8% year-on-year respectively to 18297 yuan/ton.

With the adoption of the "2024 Total Amount Setting and Distribution Plan for Hydrofluorocarbons Quota," the fluorochemical boom is expected to start a long-term cycle reversal, the price spread will start the rising mode, and the price increase elasticity of the company's third generation refrigerant is large. On October 24, the Ministry of Ecological Environment held an executive meeting of the Ministry to review and approve in principle the Scheme for Total Amount Setting and Distribution of HFC Quota in 2024. The scheme basically remains unchanged from the draft for comments. It is expected that after the quota is issued by the end of the year, the refrigerant price is expected to start the rising mode. The market share of the company's third-generation refrigerant quota is expected to be among the highest in China, and the price increase performance is flexible.

In the future, the company will extend the industrial chain layout of high-end fluorochemicals downstream, and the projects under construction will be smoothly promoted to open up new growth space. According to the disclosure of the Company's semi-annual report, the Company is actively promoting the Company's steady promotion of Zhejiang Sanmei 5000t/a FEP and 5000t/a PVDF projects, 90,000 tons of AHF technical transformation projects; Fujian Dongying 6000t/a LiPF6 and 100t/a high purity phosphorus pentafluoride projects, AHF expansion projects; Shengmei Lithium Battery Phase I 500t/a lithium difluorosulfonimide (LiFSI) projects. By the end of 3Q23, the company's projects under construction increased by 154 million yuan to 498 million yuan compared with the end of 1H23.

Investment analysis opinion: The company is one of the mainstream enterprises of the third generation refrigerant in China. It will implement quota system production next year. The supply and demand pattern is good. Fluorine chemical industry is expected to start the bottom reversal. Due to the decline in refrigerant prices and spreads due to the low season in the third quarter and the sharp decline in 142b prices and profits, we lowered the company's 2023-2025 net profit forecast to 3.19 billion yuan, 8.32 billion yuan and 1.209 billion yuan.(Originally 4.89 billion yuan, 9.60 billion yuan and 1.448 billion yuan), the corresponding EPS is 0.52 yuan, 1.36 yuan and 1.98 yuan, and the current market value corresponds to PE of 54X, 21X and 14X. Since the price and price difference of the third generation refrigerant are still at the bottom at present, the quota of the third generation refrigerant will be implemented after 2024, and the price is expected to continue to rise, and the price increase performance of the company is highly elastic, so the overweight rating is maintained.

Risk tips: 1) the company's third-generation refrigerant quota is lower than expected; 2) raw material prices have risen sharply; 3) refrigerant price repair is not as expected; 4) downstream demand for refrigerants continues to be weak; 5) the progress of new projects is not as expected.