Event: On October 28, 2023, Zhejiang Longsheng released its 2023 three-quarter report. The company's total operating income for the first three quarters was 10.830 billion yuan, a year-on-year decrease of 19.31%; net profit was 900 million yuan, a year-on-year decrease of 47.85%; net profit after deducting non-net profit was 1,116 billion yuan, a year-on-year decrease of 32.65%. The total operating income of the corresponding company in 3Q23 was 3.611 billion yuan, up 4.03% from the previous month; net profit was 107 million yuan, down 76.11% from the previous month.
The dye industry continues to be sluggish, and falling prices of the company's main products are dragging down performance. The company's revenue in the dye/additives/intermediates sector in the first three quarters was 57.79/6.96/2.250 billion yuan, YoY was -15.70%/-8.23%/-26.34%, respectively, sales volume was 16.65/4.20/676 million tons, and YoY was -5.69%/-11.51%/+3.30% respectively. The company's sales expense ratio was 4.66%, up 0.91pcts year on year; management expense ratio was 5.54%, up 1.29pcts year on year; financial expense ratio was -0.69%, down 1.44pcts year on year; R&D expense ratio was 3.85%, down 0.20pcts year on year. The company's net profit to its parent declined in the first three quarters. The net profit margin was 9.19%, down 5.40pcts from the previous year. The main reason for this was the decline in the prices of the company's main products, which affected the company's profit level. The company's average price of dye/intermediates in the first three quarters was 34703/33281 yuan/ton, a year-on-year decrease of 10.62%/28.70%.
The company's various net cash flows changed significantly in the first three quarters. Net cash flow from operating activities was $3,319 million, up 169.54% year on year; net cash flow from investment activities was -138 million yuan, up 66.97% year on year; and net cash flow from financing activities was $2,270 million, up 183.71% year on year.
The balance of cash and cash equivalents at the end of the period was $12.055 billion, up 47.05% year on year. Accounts receivable decreased by 12.83% year over year, and the turnover ratio of accounts receivable declined, from 4.99 in the same period in 2022 to 4.46. Inventories fell 4.15% year on year, and the inventory turnover ratio declined from 0.32 times in the same period in 2022 to 0.28 times.
The dye industry is still waiting to recover, and the company's leading position in the industry has obvious advantages. According to the interim report of Runtu Co., Ltd., the downstream demand for dyes gradually improved in the first half of 2023, and the growth rate of printing and dyeing cloth production rebounded month by month. Enterprises above the 1H23 printing and dyeing industry scale produced 26.964 billion meters of printed and dyed cloth, an increase of 1.66% over the previous year. On the supply side, supply in the domestic dye market has increased, and market competition has intensified. Overall, the phenomenon of oversupply in the dye industry is still obvious. The prosperity of the dye industry is low, and we are waiting for the industry to recover. The company's size and industrial chain advantages are obvious, and the leading position in the industry is stable. According to the company's interim report, the company has an annual production capacity of 300,000 tons of dyes, an annual production capacity of about 100,000 tons of additives, and an annual production capacity of 114,500 tons of intermediates. The dye and intermediates business is in a leading position in the industry. The company's industrial chain has extended from single dye products to other specialty chemicals, such as resorcinol, hydroquinone, and m-aminophenol, and other important intermediates. The industrial chain extension strategy will strengthen the company's controlling position over strategic intermediate raw materials, thereby further enhancing the company's dominance of dye products, while at the same time imposing a certain restraining effect on peer enterprises. We are optimistic about the company's leading position in the dye and intermediates industry. With the gradual recovery of the dye industry, the company's performance is expected to pick up.
The company's real estate business is progressing steadily, and future revenue is expected to gradually be realized. According to the company's interim report, the Huaxing New Town project was carefully arranged and efficiently organized, and successfully completed the concrete pouring of the large floor slab of the T1 tower and the pouring of the foundation of the high-rise residential area. The Fuxinli high-rise apartment has successfully obtained a major property certificate, and Fuxinhui's investment promotion work continues to advance, assisting major brand customers to open businesses. We are optimistic about the steady development of the company's real estate business, which is expected to help the company's revenue growth in the future.
Investment suggestions: We expect Zhejiang Longsheng's revenue for 2023-2025 to be 170.76/191.02/21,665 billion yuan, up -19.55%/11.86%/13.41% year on year, and net profit of 20.27/25.46/3.175 billion yuan, respectively, up -32.51%/25.46/3.175 billion yuan, year-on-year increase of -32.51%/25.64%/24.69%, corresponding to EPS of 0.62/0.78/0.98 yuan, respectively. Combined with the company's closing price on November 3, the corresponding PE was 14/11/9 times, respectively. We are optimistic about the company's leading position in the dye and intermediates industry and the steady development of the real estate business, maintaining an “increase in holdings” rating.
Risk warning: risk of raw material price fluctuations, risk of demand falling short of expectations, environmental risk, exchange rate risk, production safety risk, policy risk