The company reported for the third quarter of 2023, and the performance was in line with expectations. According to the company's announcement, the first three quarters achieved revenue of 1,178 million yuan (YoY -11.5%), net profit of 230 million yuan (YoY -25.0%), and net profit of 229 million yuan (YoY -24.2%); of these, 23Q3 achieved revenue of 428 million yuan (YoY +0.8%, QoQ +14.0%), achieving net profit of 72.62 million yuan (YoY -9.8%, QoQ -13.7%), and achieved net profit of 72.62 million yuan (YoY -9.2%, QoQ -13.7%) -19.7%).

Cellulose ether sales increased steadily in the first three quarters, but prices declined with raw materials, and the bottom of capsule sales rebounded quarter by quarter. With the gradual expansion of the company's asset cellulose ether production capacity and continued downstream demand, it is expected that both building material grade and food and pharmaceutical grade cellulose ether will increase throughout the year. In terms of price, the price of cellulose ether has declined mainly due to falling prices of refined cotton, propylene oxide, and chloromethane raw materials, but export prices are relatively strong, mainly because overseas customers are mostly customers with whom we have cooperated for nearly 20 years. Customer stickiness is strong, but overall cellulose ether gross margin has declined. Since this year, with the end of overseas storage of vegetable capsules and the recovery of demand for consumer health products that can be purchased at terminals, capsule sales have rebounded quarter by quarter, while prices have also rebounded slightly. However, the overall gross margin of cellulose ether and capsules declined. According to the company's announcement, the gross margin for the first three quarters fell 4.63 pct to 30.93% year on year. On the cost side, the overall sales expense ratio, management expense ratio, and R&D expense ratio for the first three quarters fell 0.73 pct year on year. Financial expenses increased due to reduced exchange earnings, and the overall net profit margin fell 3.48 pct to 19.48% year on year.

Q3 Cellulose ether prices and profits continued to decline slightly. Combined with the impact of previous production capacity conversion costs, profitability declined, and capsules increased markedly month-on-month. According to Baichuan data, the prices of cotton pulp, propylene oxide, and chloromethane, which are the main raw materials of 23Q3 cellulose ether, changed -2%, and +6%, respectively. The overall raw material price declined slightly month-on-month, so the price of cellulose ether continued to drop slightly. Furthermore, at the end of last year, the company expanded production of 20,000 tons of building-grade cellulose ether and 10,000 tons of food and pharmaceutical grade cellulose ether, and gradually entered the consolidation phase in the third quarter. The costs involved affected the gross margin decline month-on-month. Capsule sales volume is estimated to be about 3.5 billion capsules in the third quarter, an increase of about 50% over the previous month, mainly due to a recovery in downstream demand. Among them, prices in the European market have rebounded slightly. Mainly because the competitive environment in Europe is better than the US, and product requirements are higher, so the capsule business showed a recovery in volume, price, and profit in the third quarter. Overall Q3 gross margin declined 1S.02pct month-on-month to 30.42%. On the cost side, the main increase came from financial expenses. The third quarter was exchange losses, and the second quarter was exchange income. Combined with the increase in interest expenses due to debt conversion, the overall increase in financial expenses was about 25 million yuan, resulting in a month-on-month increase in financial expenses of about 25 million yuan, which had an overall impact on the net profit margin decline of 5.45 pct to 16.96%.

Cellulose ether construction projects are gradually increasing in contribution. According to the company's announcement, by the end of September 2023, the company's projects under construction and fixed assets were about 689 million yuan and 1,708 million yuan respectively, a decrease of 75.18 million yuan and an increase of 210 million yuan respectively from the end of June, mainly the 41,000 tons/year cellulose ether project (phase I), including 20,000 tons of building materials grade and 10,000 tons of food and pharmaceutical grade cellulose ether. At the same time, the production capacity of plant capsules has also increased. Capsule sales are expected to pick up quarterly in the future. As inventory is gradually digested and consumption of terminal health products continues to pick up, the company's vegetable capsule sales are expected to pick up quarter by quarter, and we expect Q4 capsule sales to continue to increase month-on-month.

Profit forecast and investment rating: Considering the decline in the price of cellulose ether in the short term and the increase in sales of vegetable capsules, and the associated costs and expenses associated with the consolidation of construction projects, the profit forecast is lowered. The net profit forecast for 2023-2025 is estimated to be about 3.0, 3.6, and 4.1 billion yuan (original forecasts of 3.4, 4.1 billion yuan, and 480 million yuan), corresponding to PE of 21, 18, and 15 times, respectively. Considering the company's main business, there is no comparable company. Referring to the company's average PE of about 24 times over the past year and a half, maintaining a “increase in holdings” rating.

Risk warning: Cellulose ether production capacity cannot be digested as expected; vegetable capsule pattern worsens; large fluctuations in raw materials affect profit levels; the company issued the “Notice on Executives Receiving Case Filing Notice from the China Securities Regulatory Commission due to Short-Term Trading” on October 26 to focus on related risks