Event: The company released its 2023 three-quarter report. In the first three quarters of 2023, the company achieved revenue of 959 million yuan, -28.30% year-on-year; net profit of 22 million yuan, -79.43% year-on-year. Among them, the third quarter achieved revenue of 331 million yuan, -16.19% year-on-year, -0.60%; net profit of the mother was 512 million yuan, -55.40% year-on-year, +262.63% month-on-month.

Results for the first three quarters were under pressure, and Q3 profit improved month-on-month. The company's revenue and net profit for the first three quarters of 2023 both declined year-on-year. The main reasons were: 1) High-purity chemicals: Prices of some of the company's high-purity chemical products declined, but judging from sales volume, the company's sales volume of high-purity chemicals such as hydrogen peroxide, sulfuric acid, peeling liquid, and side glue cleaners all increased year-on-year, and it is expected that the pressure on performance will gradually ease in the future as prices recover. 2) Lithium battery materials: Affected by the sharp decline in the price of raw materials BDO, the price of core NMP products fell year on year. The company maintained a high R&D intensity. In the first three quarters of 2023, the company's R&D expenses were about 52.24 million yuan, up 20.54% year on year; R&D expenses were 5.45%, +2.21pcts year on year. The company's gross margin for the first three quarters of 2023 was 23.79%, +3.05pcts year on year; net profit margin was 1.21%, -6.86pcts year on year.

High-purity chemical products are high-end, and the photoresist business continues to advance. The company's high-purity chemicals product structure continues to be high-end, and production capacity is further expanded. The first phase of the 30,000-ton semiconductor-grade high-purity sulfuric acid production line has reached G5 grade. The products have been supplied to the domestic semiconductor market, and the second phase of the 60,000-ton project has reached the intended state of use. In the photoresist field, photoresist products are supplied to well-known domestic large-scale semiconductor companies such as SMIC and Hefei Changxin. Some types of KrF high-end photoresists have been mass-produced and supplied to the market.

The plan is to introduce Sinopec capital to invest in the war, and aim to increase funding to grow. On November 1, Ruihong Suzhou, a holding subsidiary of the company, plans to introduce strategic investor Sinopec Group Capital Co., Ltd. to increase capital to raise 850 million yuan through targeted additional capital for R&D, procurement, production and sales of advanced process semiconductor photoresist and supporting reagents and related investments. Sinopec Capital has advantages in terms of capital and resources, helping the company enhance its market competitiveness and help the company develop in the long term.

Profit forecast and investment recommendations: Due to falling prices of some high-purity chemicals and NMP, and weak downstream demand, we forecast net profit of $43 million, 163 million, and $250 million for 2023-2025, respectively, corresponding to current PE of 265 times, 70 times, and 46 times, respectively. As a leader in the domestic wet electronic chemicals industry, the technical level of mainstream products has reached the level of international peers. Growth is expected to resume as downstream demand improves, maintaining a “buy” rating.

Risk warning: downstream demand falls short of expectations, R&D falls short of expectations, product price risk, capacity building risk, etc.