Incidents: On October 28, 2023, Taihe New Materials released its 2023 three-quarter report. The company's operating income for the first three quarters was 2,910 billion yuan, up 3.83% year on year; net profit was 278 million yuan, down 8.65% year on year; net profit after deducting non-net profit was 236 million yuan, down 12.21% year on year. The corresponding company's 3Q23 operating income was 969 million yuan, up 4.33% from the previous month; net profit was 63 million yuan, down 20.17% from the previous month.
Spandex continued to lose money and increase in management expenses, and the company's performance was under pressure in the short term. The company's sales expense ratio for the first three quarters was 2.58%, up 1.00pcts year on year; management expense ratio was 6.33%, up 2.69pcts year on year; financial expense ratio was -1.02%, up 0.62 pcts year on year; and R&D expense ratio was 5.20%, up 0.83 pcts year on year. The company's net profit declined year on year. Net profit for the first three quarters was 11.17%, down 1.15pcts year on year. The main reason for this was loss in the spandex sector and an increase in management expenses such as equity incentive expenses. Looking at a single quarter, 3Q23's gross margin was 20.78%, and 2Q23's gross margin was 25.17%, down 4.39pcts from the previous month.
The company's various net cash flows changed significantly in the first three quarters. Net cash flow from operating activities was $253 million, down 31.79% year on year; net cash flow from investment activities was -1,529 billion yuan, down -636.95% year; and net cash flow from fund-raising activities was $2,958 billion, up 906.22% year on year.
The balance of cash and cash equivalents at the end of the period was $2,783 million, up 28.65% year on year. Accounts receivable rose 69.48% year over year, and the turnover ratio of accounts receivable declined sharply, from 14.20 in the same period in 2022 to 9.35. Inventories rose 57.88% year on year, and the inventory turnover rate declined, from 3.10 times in the same period in 2022 to 2.47 times.
Oversupply has intensified market competition, and the prosperity of the spandex industry has declined. According to the company's November 8 investor exchange notes, short-term supply in the spandex industry exceeds demand, and new production capacity is still being put into operation in the short term. The industry is currently in the process of integration. The price of spandex fell against the backdrop of loose supply and demand. According to Flush Financial Data, the average price of 3Q23 spandex (20D) /spandex (30D) /spandex (40D) was 36207.69/34707.69/31707.69 yuan/ton, -4.12%/-2.91%/-2.81%, respectively, compared to 2Q23. We believe that the short-term prosperity of the spandex industry is weak and has yet to gradually recover after the industrial structure is adjusted.
The aramid sector continues to expand production, which is expected to drive continued growth in performance in the future. There are a wide range of downstream applications of aramid, and the trend of domestic substitution is obvious. According to the October 31 investor exchange minutes, inter-company aramid is mainly used in the fields of filtration, protection and aramid paper, while para-aramid is mainly used in optical cables, automobiles, and protection fields. The company has abundant aramid production capacity under construction. According to the notes of the investor exchange on November 3, the company currently has a production capacity of 16,000 tons/year for interphase aramid and 10,000 tons/year for counteraramid. The production capacity under construction includes 20,000 tons/year of aramid and 12,000 tons/year of para-aramid projects. Of these, 6,000 tons of para-aramid production capacity is expected to be put into operation by the end of this year, and the remaining 6,000 tons of production capacity is expected to be put into operation next year. We are optimistic that the production capacity of the company's aramid sector will continue to expand, which is expected to drive the company's performance growth in the future.
The company's industrial layout is getting richer, and new construction projects are expected to follow the second revenue growth curve. According to the company's November 9 investor exchange notes, the company's aramid coated diaphragm project was put into operation in March 2023. Samples have been sent to dozens of customers for testing, and are currently being sold in small batches. The green printing and dyeing project was put into operation at the end of September this year, and is currently in the customer proofing and verification stage. The new material composite project is mainly used for the lamination of aramid paper, and downstream applications for stator slot insulation. Production is expected to begin in November this year. We are optimistic about the gradual commissioning of the company's new construction project, which is expected to open up a new revenue growth curve for the company.
Investment suggestions: We expect that the 2023-2025 revenue of Taihe Xincai will be 45.32/59.01/7.622 billion yuan, up 20.85%/30.21%/29.16% year on year, and net profit of 3.84/7.12/1,048 billion yuan, respectively, year-on-year increase of -11.87%/85.39%/47.21%, corresponding to EPS of 0.44/0.82/1.21 yuan. Combined with the company's closing price on November 9, the corresponding PE was 36/19/13 times, respectively. We are optimistic about the company's aramid coated diaphragms and green printing and dyeing projects to maintain the “buy” rating.
Risk warning: risk of raw material price fluctuations, risk of demand falling short of expectations, project construction risk, environmental risk