Matters:

The company released its three-quarter report for 2023. The first three quarters achieved revenue of 2,538 billion yuan, -30.0% year-on-year; net profit of 153 million yuan, -64.4% of the previous year; net profit after deduction of 174 million yuan, minus net profit of 174 million yuan, or -57.8% year-on-year. Among them, Q3 achieved revenue of 709 million yuan in a single quarter, -48.0% year-on-month and -24.0%; net profit of 1,344,700 yuan, -99.2% year-on-year, -98.3%; net profit after deducting non-return net profit of 7.3069 million yuan, -95.2% year-on-year, -92.6% month-on-month.

Commentary:

According to operating data, the company's Q3 gross profit margin for a single quarter was 3.9%, -7.3pct, month-on-month, -5.7pct; quarterly net profit margin was 0.2%, y-11.9pct, y-8.4pct month-on-month. Profit levels declined sharply from month to month.

The EU's anti-circumvention investigation has hit the domestic biodiesel industry drastically. Since August, the European Union has launched anti-circumvention investigations against biodiesel in China and the United Kingdom. The sudden investigation caused a sharp decline in the purchasing intentions of European buyers to leave room for possible increased trade measures. Chinese biodiesel producers, on the other hand, are busy completing registration and complaint exemptions in response to the EU's anti-circumvention investigation. They are facing the dilemma of stagnating sales and a lack of new orders. Looking back at the export data disclosed by the General Administration of Customs, exports of the firewood industry declined markedly in September. The national biodiesel export volume was 119,600 tons, -43.2% year on year and -25.8% month on month, the lowest level of the industry's monthly export volume since 22Q2; the export value was 132 million US dollars, -62.3% year on year, -23.2% month on month.

Q3 The price spread of domestic raw firewood fell sharply, and the industry reached the bottom of the boom. The average price of FAME on 23Q3 NESTE's official website was 1226.6 US dollars/ton, -23.9% year on year, +20.9% month on month; Baichuan China waste oil biodiesel average price is 8000.0 yuan/ton, -22.2% year on year, -2.4% month on month. Compared with the month-on-month increase in overseas firewood prices driven by the rise in crude oil prices, domestic orders due to anti-circumvention investigations were limited, and the price of raw firewood was suppressed and declined month-on-month. On the profit side, in 23Q3, the price difference of waste oil and biodiesel in China was 14,74.5 yuan/ton, -20.1% year-on-year and -36.2%; at only 10.0% of the price difference since 2020, the industry is at the bottom of the boom.

China's biodiesel industry leader actively cooperated with the investigation to apply for an exemption. As one of the largest domestic leading firewood companies with the strongest production and marketing capacity and the highest waste oil conversion rate, the company's equipment technology and profit level have remained at the forefront of the industry for many years. Since this anti-circumvention investigation targets biodiesel companies across the country, the company is also one of the stakeholders involved. At present, the company team has carefully studied relevant EU policies, actively cooperated with EU investigations and exemption applications; and taken measures to protect its own rights and interests to ensure the normal operation of the company's business.

Investment advice: Considering that the anti-circumvention investigation may have an impact on China's biodiesel industry over a period of time, we lowered the company's profit forecast for 2023-2025 to 2.16/4.52/644 billion yuan (previous value was 3.62/5.52/708 million yuan), corresponding to EPS 1.80/3.77/5.37 yuan. The current market value corresponding to PE is 22x, 10x, and 7x respectively. Referring to the company's historical transaction PE (TTM) center, we gave 2024 16 times PE, corresponding to the target price of 60.3 yuan, and adjusted it to the “recommended” rating.

Risk warning: Prices of crude oil and vegetable fats have fluctuated greatly, industry policies have changed significantly, the foreign trade pattern has undergone major adjustments, and research and development of new technologies and products has lagged behind advanced technology in the market.