Description of the event

The company released financial reports: Revenue for the first three quarters of 2023 was about 650 million yuan, down 0.2% year on year, imputed net profit was about 65 million yuan, down 19% year on year, and deducted non-net profit fell 18% year on year. Revenue for the third quarter of 2023 was about 210 million yuan, down 14% year on year, imputed net profit was about 28 million yuan, up 19% year on year, and net profit after deducting about 23% year on year.

Incident comments

When the titanium dioxide business is on the rise, cost investment comes before revenue is reflected. The company's revenue for the first three quarters was basically the same year on year. Among them, titanium dioxide revenue contributed less. The revenue of pearlescent materials is expected to decline slightly year on year. The gross profit margin for the first three quarters was 34.7%, up 3.0 percentage points from the previous year, or mainly due to improvements in the gross margin of the pearlescent materials business. Titanium dioxide is not expected to change much in gross margin due to the lack of large-scale sales of titanium dioxide. The rate for the first three quarters was about 22.0%, up 5.2 percentage points from the previous year. Among them, sales, management, and finance rates increased by 0.5, 2.2, and 2.8 percentage points respectively. The increase in management expenses was mainly due to depreciation and amortization of the titanium dioxide business and the increase in management personnel. The increase in financial expenses was mainly due to the increase in interest expenses due to capital expenses of titanium dioxide. Interest expenses for the first three quarters of the past three years were 1448, 2502, and 41.16 million yuan, respectively.

The improvement in performance in the third quarter was still due to pearlescent materials. The company's gross margin for the third quarter was about 39.5%, up 11.6 percentage points year on year and 1.7% month on month, due to improved profitability of pearlescent materials, or from an increase in the share of high-end products; the period rate was about 24.6%, up 9.4 percentage points year on year, mainly due to a sharp increase in management and financial rates. The final imputable net interest rate was about 13%, up 3.6 percentage points from the previous year and 0.9 percentage points from the previous month. As can be seen, the company's inventory at the end of the third quarter was about 900 million yuan, which continues to increase from the inventory of 790 million yuan at the end of 2022, or it is a semi-finished product in the process of climbing and optimizing the titanium dioxide production line. As the company's relevant supporting production equipment is in place, it will later be converted into finished products for marketing and sales.

From pearlescent materials to titanium dioxide, after nearly four years of production line investment and optimization, new business growth will begin. The company's main business has changed over the past few years. The product has been extended from pearlescent materials to titanium dioxide, which means that it has moved from the segment of inorganic pigments to the mainstream market. The company's core competitiveness lies in the innovative use of hydrochloric acid extraction methods to produce titanium and iron oxides at low cost. This technology is suitable for both pearlescent materials and titanium dioxide. In the process of resuming production, we see the persistence of new materials companies on the path of innovation: the world's first hydrochloric acid extraction titanium dioxide project began in 2018, trial production of the 200,000 tons of titanium dioxide project with an annual output of 200,000 tons began in August 2019, and reached a stable state in 2020, achieving continuous large-scale mass production; in December 2020, the titanium dioxide project with an annual output of 100,000 tons began trial production and was officially put into operation in 2022. After a year of equipment optimization and process adjustments, the company's current production status can be defined as “stable scale production”.

The order was initially released. On August 25, Zhengtai New Materials, a wholly-owned subsidiary of the company, signed a “Product Purchase and Sale Contract” with an application customer in the downstream plastics field. It was agreed that Zhengtai New Materials would deliver 10,000 tons of titanium dioxide with a specification model of T10EX 803 from September 1 to December 31, 2023, with a sales amount of 276 million yuan including tax. The signing of the daily business contract this time reflects the downstream customer's recognition of the quality of the company's hydrochloric acid extraction method of titanium dioxide. The smooth execution of the contract will have a certain impact on the company's performance.

Continuously meeting production quality and stability standards is a prerequisite for the release of order size, so we must pay attention to positive changes on the production side.

The company's net profit attributable to 2023-2025 is estimated to be 1.0, 7.2, and 1.38 billion yuan, with corresponding valuations of 243, 35, and 18 times.

Risk warning

1. Downstream demand for related products has declined sharply;

2. Product performance and customer certification take a long time.