Incidents:

On October 28, the company released its 2023 three-quarter report: in the first three quarters of 2023, the company achieved operating income of 3,229 billion yuan, +18.69% year-on-year; realized net profit of 162 million yuan, -28.86%; and the weighted average return on net assets was 6.30%, down 4.31 percentage points from the previous year.

Gross profit margin was 15.73%, down 1.50 percentage points year on year; net sales profit margin was 5.03%, down 3.35 percentage points year on year.

Among them, Q3 in 2023 achieved revenue of 1,149 billion yuan, +20.37% year-on-month and +0.73%; realized net profit of 52 million yuan, -42.58% year-on-year, and -35.62%; and average return on net assets was 2.01%, down 1.83 percentage points from the previous year and 1.16 percentage points from the previous year. The gross profit margin of sales was 14.09%, down 2.28 percentage points from the previous year and 2.49 percentage points from the previous year; the net sales profit margin was 4.53%, down 4.96 percentage points from the previous year, down 2.56 percentage points from the previous year.

Investment highlights:

Profit from major products declined, and the company's third-quarter results were under pressure

In Q3 of 2023, the company achieved revenue of 1,149 million yuan, +20.37%, and +0.73% over the previous year; realized net profit of 52 million yuan, -42.58% year-on-year, -35.62% month-on-month, and -39 million yuan, year-on-year, and -29 million yuan month-on-month. Among them, in Q3 of 2023, gross profit was 162 million yuan, or -27 million yuan; financial expenses reached 13 million yuan, +18 million yuan; asset impairment losses were -11 million yuan, a decrease of 23 million yuan; and income tax was 0.9 billion yuan, an increase of 11 million yuan over the previous month. The month-on-month decline in gross profit was mainly due to the month-on-month decline in price spreads for the company's main products. According to Wind, the average price of HFP in the third quarter of 2023 reached 37,837 yuan/ton, -4.23%; the R32 price difference reached 1,568 yuan/ton, -28.65%; and the R134a price difference reached 6788 yuan/ton, -5.86% month-on-month. Financial expenses increased month-on-month, either due to an increase in interest expenses combined with a decrease in exchange earnings; asset impairment losses decreased month-on-month, or due to lower inventory price losses and more impairment in contract performance costs in the second quarter, which eased somewhat in the third quarter. Looking ahead to the fourth quarter, the company's new production capacity was launched one after another, and profits from major products were gradually restored. According to Wind, as of October 31, the R32 price difference in the fourth quarter of 2023 reached 2,360 yuan/ton, +50.47%; the R134a price difference reached 7719 yuan/ton, +13.71% over the previous month, which is optimistic that the company's fourth quarter performance improved.

In terms of the period expense ratio, the company's sales/management/finance expense ratio in 2023Q3 was 1.50%/6.93%/1.10%, respectively, year-on-year -0.08/-1.41/+2.44pct, and -0.11/+0.03/+1.60pct month-on-month

A draft for solicitation of comments on the HFCs quota plan was issued. Third-generation refrigerants are expected to usher in a boom cycle. On September 21, the Ministry of Ecology and Environment issued the “2024 Total HFC Quota Setting and Allocation Implementation Plan (Draft for Comments)” and preparation instructions. The plan proposes to determine that the baseline value of HFCs production in China is 1,852 million tCO2 and the HFCs usage baseline value is 904 million tCO2 (including imported baseline value of 05 billion tCO2). For the portion of the total quota, 65% of the HCFCs production and use baseline value will not be distributed to production units and user units in 2024; at the same time, quota management for HFCs will continue to be carried out by variety. Production units can adjust different types of HFCs when applying for the 2024 quota, but the total carbon dioxide must not be increased The principle that the equivalent amount of HFCs of any type shall not exceed 10% of the quota of that type approved by the production unit in accordance with this plan. Looking at the long term, under the draft quota plan for comments, the 65% HCFCs baseline value will not be distributed yet, HFCs are managed by variety, and the conversion ratio of different types of quotas is limited to 10%. This forms a good control of third-generation refrigerants on the supply side. At the same time, it will still take time for fourth-generation refrigerants to be applied economically and replace third-generation refrigerants on a large scale; on the demand side, there is still room for growth in global household air conditioners, car air conditioners, refrigerators, etc., while the reduction in second-generation refrigerants will also bring about a certain replacement market, demand for third-generation refrigerants is expected to increase steadily. As supply is controlled and demand is growing steadily, third-generation refrigerants are expected to usher in a long business cycle. Yonghe Co., Ltd. is expected to benefit as a leading third-generation refrigerants company.

New production capacity is gradually being implemented, and the company will show high growth in the future

The company has continued to build bases in Shaowu and Inner Mongolia in recent years, and new production capacity has gradually been implemented. As of mid-2023, the construction content of the first phase of the Shaowu Yonghe Fluorine Chemical Production Base project has gradually entered the final stage. The remaining phase of the first phase of FEP and 10,000 tons/year of PTFE has been tested and produced one after another, and technicians are optimizing and debugging various product indicators. The Shao Wu Yonghe Phase II (50,000 tons/year hydrofluoric acid, 30,000 tons/year electronic grade hydrofluoric acid, 30,000 tons/year R22, 80,000 tons/year PTFE, 60,000 tons/year FEP, etc.) and 10,000 tons/year PVDF, and 30,000 tons/year HFPO expansion projects are being implemented normally according to the construction process. Inner Mongolia Yonghe's 70,000 tons/year VDF was successfully put into production; projects such as 80,000 tons/year VDF, 60,000 tons/year PVDF, and 10,000 tons/year of perfluorohexanone are progressing steadily. The preliminary approval procedures for the Baotou Yonghe New Energy Materials Industrial Park project, such as the filing, environmental impact assessment, and energy saving review, have been completed one after another. With the gradual implementation of new production capacity, the company will show high growth in the future.

The profit forecast and investment rating comprehensively consider the company's business situation in the first three quarters. We have appropriately lowered the company's profit forecast. The company's net profit for 2023-2025 is estimated to be 2.46, 5.54, and 796 million yuan respectively, corresponding to PE 36, 16, and 11 times, respectively. Considering the company's future growth, it maintains a “buy” rating.

Risk indicates policy implementation, new capacity construction progress falling short of expectations, new capacity contribution performance falling short of expectations, fluctuations in raw material prices, changes in environmental protection policies, and a sharp decline in the economy.