Incidents: On October 28, 2023, Yonghe Co., Ltd. released its 2023 three-quarter report. The company's operating income for the first three quarters was 3,229 billion yuan, up 18.69% year on year; net profit was 162 million yuan, down 28.86% year on year; net profit after deduction was 151 million yuan, down 24.29% year on year. The corresponding company's 3Q23 operating income was 1,149 billion yuan, up 0.73% from the previous month; net profit was 52 million yuan, down 35.62% from the previous month.

The release of fluorinated polymer materials drives revenue, and refrigerant prices need to be fixed. The company's revenue in the fluorocarbon chemicals/fluoropolymer materials/chemical raw materials sector in the first three quarters was 17.48/9.81/422 million yuan, YoY was -0.63%/60.49%/53.45% respectively; sales volume was 8.57/1.89/1581 million tons, YoY was 24.80%/138.61%/131.67% respectively; average product price was 20395/51882/2670 yuan/ton, YoY was -20.37%/-32.74%/-33.76% 。 The company's sales expense ratio for the first three quarters was 1.60%, up 0.15pcts year on year; management expense ratio was 5.39%, down 0.52pcts year on year; financial expense ratio was 0.85%, up 1.44pcts year on year; and R&D expense ratio was 1.96%, up 0.70 pcts year on year. The company's net profit declined in the first three quarters. The net profit margin was 5.03%, down 3.35pcts from the previous year. The main reason for this was the decline in refrigerant prices and the rise in the price of fluorite, the main raw material.

The company's various net cash flows changed significantly in the first three quarters. Net cash flow from operating activities was $252 million, down 24.25% year on year; net cash flow from investment activities was -1,098 million yuan, down 17.55% year on year; and net cash flow from fund-raising activities was $794 million, up 51.62% year on year. The balance of cash and cash equivalents at the end of the period was $132 million, up 257.82% year on year. Accounts receivable decreased by 0.87% year on year, and the turnover ratio of accounts receivable increased from 7.93 in the same period in 2022 to 8.98. Inventories rose 28.70% year on year, and the inventory turnover rate declined from 4.68 times in the same period in 2022 to 4.62 times.

With the implementation of the quota plan, third-generation refrigerants may enter a boom cycle. On October 24, 2023, the Ministry of Ecology and Environment held an executive meeting to review and approve the “2024 Total HFC Quota Setting and Allocation Plan”. The supply restrictions for three generations of refrigerants have been officially implemented, and industry supply will gradually tighten. We believe that with the upgrading of consumer consumption and the acceleration of the urbanization process, there is still a lot of room for improvement in the global penetration rate of household and automobile air conditioners, refrigerators, etc., and it is expected that the number of residents holding products such as air conditioners and refrigerators will continue to increase. Combined with the maintenance demand for existing equipment, driving the continuous expansion of the third-generation refrigerants market, and demand continues to improve. We believe that there are still intellectual property barriers for fourth-generation refrigerants, and the synthesis process is more complicated. Currently, product prices are expensive, and it is difficult to replace third-generation refrigerants on a large scale in the short term. Demand for third-generation refrigerants continues to improve under the long-term trend. The continuous increase in demand combined with the gradual tightening of supply will drive product prices to continue to rise, and third-generation refrigerants may enter a business cycle. According to the company's interim report, the company has a production capacity of 190,000 tons/year for fluorocarbon chemical monomers. The main products cover three generations of refrigerants such as HFC-32, HFC-152a, and HFC-143a, as well as mixed refrigerants such as R410A and R404A. The company successfully realized the entire fluorine chemical industry chain layout of “fluorite - hydrofluoric acid - monomers and mixed fluorocarbon chemicals - fluorine polymer materials”. With the advantages of integrating its own industrial chain, the company can effectively reduce production costs and achieve stable operation. In a context where the price of third-generation refrigerants is expected to rise, we are optimistic about the company's industrial chain integration advantages in fluorine chemicals. It can improve the competitiveness of the company's refrigerant products in the market, and the sector's profit level is expected to increase.

The company has sufficient fluorite resources to provide a guarantee for production and operation. According to the company's interim report, the company has independent fluorite resources (2 mining rights, 3 prospecting rights), and it has been discovered that the resource reserves held by fluorite have reached 4.852,700 tons of ore. The company has the advantage of supplying its own raw materials. Sufficient raw materials can guarantee the stable operation of the downstream refrigerants and fluoropolymer materials sectors. According to the company's announcement on the acquisition of a mining license by its wholly-owned subsidiary, Huaxing Mining, a wholly-owned subsidiary of the company, has completed work related to the transfer of prospecting rights to mining rights for the Aobao Fluorite Mine in Sumochagan, Sizi Wangqi, and obtained a “mining license” issued by the Inner Mongolia Autonomous Region Department of Natural Resources. The mine has discovered fluorite resource reserves of 2,556 million tons, further enhancing the company's ability to guarantee fluorite resources. In a situation where the supply of fluorite resources is tight, we are optimistic about the company's fluorite resource advantages, which can guarantee the stable operation of the company's refrigerants sector and provide a raw material base for the expansion of production capacity in the fluoropolymer materials sector.

The company's project was built in an orderly manner, and production capacity was gradually released. According to the company report, Shao Wu Yonghe has tested the first phase of 0.75 million tons/year of FEP and 10,000 tons/year of PTFE, and the second phase, 10,000 tons/year PVDF, and 30,000 tons/year HFPO expansion projects are progressing steadily. Inner Mongolia Yonghe's 70,000 tons/year VDF was successfully put into operation, and projects such as 80,000 tons/year VDF, 60,000 tons/year PVDF, and 10,000 tons/year of perfluorohexanone are under construction. Baotou Yonghe New Energy Materials Industrial Park has completed the relevant pre-approval procedures. The downstream production capacity mainly includes 20,000 tons/year HFO-1234yf unit, 23,000 tons/year HFO-1234ze unit co-production HCFO-1233ZD unit, 10,000 tons/year perfluorohexone unit, 180,000 tons/year methylene chloride plant, 250,000 tons/year calcium chloride plant, 50,000 tons/year ammonia synthesis unit, and 60,000 tons/year vinyl chloride plant. We are optimistic about the gradual release of the company's production capacity, which is expected to open up a new revenue growth curve for the company.

Investment suggestions: We expect the 2023-2025 revenue of Yonghe Co., Ltd. to be 46.21/60.15/7.429 billion yuan, up 21.48%/30.18%/23.50% year on year, and net profit of 2.58/6.27/870 billion yuan respectively, up -14.18%/143.41%/38.68% year on year, corresponding to EPS of 0.68/1.65/2.29 yuan. Combined with the company's closing price on November 6, the corresponding PE was 35/14/10 times, respectively. We are optimistic about the company's industrial chain integration advantages and sufficient fluorite reserves in fluorine chemicals to maintain the “buy” rating.

Risk warning: risk of raw material price fluctuations, risk of falling short of expectations, project construction risk, environmental policy risk