Incidents:

On October 30, 2023, Shandong Heda released its three-quarter report for 2023: in the first three quarters of 2023, the company achieved operating income of 1,178 billion yuan, -11.5%; realized net profit of 230 million yuan, -25.0%; realized net profit after deduction of 229 million yuan, -24.2%; and a weighted average ROE of 11.6%, -6.5 pct year-on-year. Gross profit margin of 30.9%, year-on-year -4.6 pct; net sales profit margin 19.5%, y-3.5 pct; net cash flow from operating activities is 100 million yuan.

Among them, Q3 in 2023 achieved revenue of 428 million yuan, +0.8% yoy and +14.0%; realized net profit of 73 million yuan, -9.8% yoy, -13.7%; realized net profit deducted from net profit of 71 million yuan, -9.2% yoy, -19.7%; and weighted average ROE of 3.6%, -0.9 pct year-on-year. Gross profit margin of 30.4%, -0.8 pct year-on-year, -1.0 pct; net sales profit margin 17.0%, -2.0 pct, month-on-month, -5.4 pct; net cash flow from operating activities was $35 million.

Investment highlights:

In Q3, the main business sentiment has rebounded, depreciation pressure on new projects has increased, and 2023Q3, the company's main business prosperity has rebounded, but depreciation pressure on new projects has increased, and overall operations have been steady. Q3 The company's net profit was 73 million yuan, a year-on-year decrease of 80 million yuan and a decrease of 11 million yuan over the previous year. On the one hand, entering the second half of 2023, the prosperity of the company's main business industry is picking up, product prices are stabilizing, the new production capacity of Gaoqing Phase I has begun to be gradually released, and the capacity utilization rate has gradually increased; on the other hand, after the Gaoqing Phase I project has been strengthened, the pressure on depreciation and amortization of fixed assets has also increased. The gross profit of 2023Q3 Company was 130 million yuan, -03 billion yuan year-on-year, and +0.12 billion yuan month-on-month. Q3 The year-over-year and month-on-month changes in management expenses were -0.08/+0.7 billion yuan, respectively, and financial expenses increased by $0.25/26 million, respectively, mainly due to a decrease in exchange earnings and an increase in interest on convertible bonds; credit impairment losses decreased by $10 million year-over-year and month-on-month respectively, mainly due to a decrease in impairment accrued on accounts receivable, and net income from changes in fair value changes increased by $0.04/011 million, respectively. It was mainly affected by changes in the fair value of forward settlement transactions. In addition, Q3 investment net income decreased by $12 million month-on-month, mainly due to a decrease in investment income in joint ventures and joint ventures.

The first phase of Gaoqing is gradually being rolled out. The plant-based meat project is expected to be rich in projects under construction by the pilot production company before the end of the year, and the capacity for multiple products will continue to expand, with sufficient growth momentum. The first phase of Gaoqing's cellulose ether project was successfully launched in November 2022, and the additional production capacity is gradually being released. The production line for pure plant capsules has been completed and trial production has begun, and the second-generation plant capsule products have completed technical reserves and been recognized by customers. The construction of the 10,000-ton plant-based meat project in Mitga is in the equipment installation stage, and trial production is expected before the end of 2023.

Zhongfuheda achieved a merger and further enrich the company's cellulose ether product line. On August 28, 2023, the company plans to acquire 100% of Zhongfuzhiwei's shares in two stages with its own capital. Zhongfuzhiwei is mainly engaged in hydroxyethyl cellulose (HEC), which is widely used in household chemicals, latex coatings, polyvinyl chloride, ceramics, etc., and the second phase of the hydroxyethyl cellulose project, which began construction in 2022, has now been completed. The HEC production capacity after delivery will reach 10,000 tons/year, ranking among the highest in the country. After the company acquires shares in Zhongfu Zhi, the company's cellulose ether production capacity is expected to increase by 10,000 tons, which is conducive to improving the company's cellulose ether product line and increasing the supporting capacity of the cellulose ether series products.

On September 25, 2023, the company completed the first phase of the commercial registration change to acquire Zhongfu Zhiwei and changed its name to “Zhongfuheda”. The company holds 47.08% of the shares of Zhongfu Zhiwei. Furthermore, the company signed a “Voting Rights Delegation Agreement” with Zhongfu Zhiwei shareholders Wang Shuchang and Ma Zhiyuan. After the agreement came into effect, the company held a total of 52.83% of the voting rights of Zhongfuheda, and more than half of the board seats. Zhongfuheda was included in the scope of the company's consolidated statements.

Profit forecast and investment rating As the company's high youth project stabilizes and increases depreciation costs, we adjusted the company's performance forecast. The estimated net profit for 2023/2024/2025 is 3.18/4.20/575 billion yuan respectively, corresponding to PE 18, 14, and 10 times. The company's future growth path is clear: the Gaoqing project is gradually implemented, plant capsule production capacity is gradually released, and plant-based meat will be mass-produced in the future, so it will maintain a “buy” rating.

The risk indicates the risk of fluctuations in upstream raw material prices and the risk of falling product prices. Demand from the downstream terminal real estate, pharmaceuticals, and food industries falls short of expectations, capacity construction and commissioning progress for new construction projects is lower than expected, and the inflation rate in Europe and the US remains high.