The company's performance in the third quarter of 2023 turned a loss into a profit, mainly due to stable prices of pre-baked anodes and petroleum coke. We expect the company to benefit from increased production capacity for pre-baked anodes and battery anodes in the future. Due to the sharp decline in prices of pre-baked anodes and petroleum coke during the year, the company's profit was put under significant pressure. The company's net profit forecast for 2023-2025 was lowered to -1.23/8.55/ 1,090 billion yuan, giving the company a target price of 22 yuan/share in 2024 and maintaining the company's “buy” rating.

The results for the third quarter of 2023 turned a loss into a profit. In the first three quarters of 2023, the company achieved operating income of 11.930 billion yuan, a year-on-year decrease of 12.98%, and net profit of 332 million yuan, turning negative year-on-year. In the third quarter of 2023, the company achieved revenue of 3.800 billion yuan, a year-on-year decrease of 33.87%, a year-on-year decrease of 2.76%, and net profit of 77 million yuan, a year-on-year decrease of 78.64%, turning a month-on-month loss into a profit.

The price of pre-baked anodes has gradually stabilized, driving the company's profit recovery. According to the company's announcement, the product cost lags behind the product price due to the mismatch between the production cycle of pre-baked anodes and the product pricing cycle. Therefore, when both product costs and prices are in a continuous downward range, this mismatch can lead to inventory loss, thus affecting the company's profits.

From December 2022 to June 2023, low sulfur/medium sulfur/high sulphur petroleum coke prices fell by 39.55%/44.28%/39.17%, respectively, and the price of pre-baked anodes reached 39.47%. Affected by this, in the first and second quarters of 2023, the company achieved gross profit margins of 1.58% and -1.04%, down 9.58pcts and 20.74pcts year-on-year respectively, down 5.80pcts and 2.62pcts month-on-month. Since June 2023 (up to October 30), the prices of petroleum coke and pre-baked anodes have declined by only 9.76% and 1.08%, gradually stabilizing. Benefiting from this, in the third quarter, the company achieved a gross sales margin of 9.79%, an increase of 10.83pcts over the previous month. As crude oil prices continue to strengthen, it is expected that subsequent oil coke and pre-baked anode prices will be supported, which is expected to drive the company's profits to continue to recover.

The increase in anode production capacity is progressing steadily, and the overseas layout expands market space. As of the first half of 2023, the production capacity of Suotong Yunalu's 900 kt/a carbon materials project (phase II 300 kt/a) has been released, and the company's pre-baked anode operation production capacity has reached 2.82 million tons; the Shandong Innovation Phase II project, the 300,000 ton aluminum carbon material project in Suotong, Longxi, and the 1 million ton calcined coke project in Zhijiang, Hubei have been officially launched, aiming to be completed and put into operation according to the plan. The company maintains a production capacity target of 5 million tons at the end of 2025, and the increase is worth looking forward to. Furthermore, in the first half of the year, the company announced that it signed an investment memorandum of understanding with its long-term customer, UAE Global Aluminum (EGA), to jointly build a pre-baked anode production base in the UAE to meet the needs of EGA and surrounding regions for pre-baked anode products; furthermore, the company plans to continue promoting this joint venture cooperation model among high-quality foreign customers, which will help greatly expand the company's future market space.

The battery anode layout has been carried out as scheduled, and the increase in production capacity is worth looking forward to. As of the first half of 2023, the company's new 40,000-ton graphitization project in Xinyuan, Inner Mongolia and the first phase of the Shengyuan anode project have been put into operation with 25,000 tons of graphitization capacity. The main 770MW photovoltaic power generation project has been completed, and the company expects electricity to be connected in the second half of the year. The company expects to develop a production capacity of 80,000 tons of anode materials by the end of 2023. In addition, on August 31, 2023, the company announced that it plans to invest 2,475 billion yuan to supplement the first phase of the lithium-ion battery anode material integration project with an annual output of 200,000 tons. The first phase of the investment project includes a precursor process of 50,000 tons, integration of anode materials for lithium-ion batteries with an annual output of 50,000 tons, and supporting public auxiliary facilities. The construction period is 18 months. The increase in the company's anode production capacity and profit margin is worth looking forward to.

Risk factors: Prices of pre-baked anodes and petroleum coke continue to decline unilaterally; demand for electrolytic aluminum is weak; exports of pre-baked anodes are lower than expected; construction progress of the company's ongoing projects is slow; customer verification and introduction of the company's anode materials falls short of expectations.

Profit forecast, valuation and ratings: The company's performance in the third quarter of 2023 turned a loss into a profit, mainly due to stabilizing prices for pre-baked anodes and petroleum coke. We expect the company to benefit from increased production capacity for pre-baked anodes and battery anodes in the future. Since 2023, the price of pre-baked anodes and petroleum coke has fallen sharply on one side and exceeded expectations, and the mismatch between the prebaked anode production cycle and product pricing cycle has caused the company to continue to incur inventory losses, causing the company's pre-baked anode business profit to decline sharply beyond expectations. Subsequent improvements in the profitability of the pre-baked anode business will take time.

At the same time, since the third quarter of 2022, competition in the battery anode industry has become more intense, causing the company's related product processing fees and unit gross profit to fall short of our previous expectations. Taking into account the above factors, the company's net profit forecast for 2023-2024 was lowered to -123/855 million yuan (original forecast was 17.27/2.100 billion yuan), and the new company's net profit forecast for 2025 was 1,090 billion yuan, corresponding to the 2023-2025 EPS forecast of -0.23/1.58/2.01 yuan. China Aluminum, Yunlu Co., Ltd. and Tianshan Aluminum were selected as comparable companies. Comparable companies' average PE in 2024 was 9.8 times (as of October 31, 2023, based on Wind's unanimous expectations). Considering that the pre-baked anode industry is expected to gradually recover and the company has a leading position in the pre-baked anode industry, the company was given a PE valuation of 14 times in 2024, corresponding to a target market value of 12 billion yuan for 2024, and a target price of 22 yuan/share for 2024, maintaining a “buy” rating.