Event: On October 26, 2023, Real Madrid Technology released its three-quarter report for 2023. The company's revenue for the first three quarters was 1,406 billion yuan, down 18.31% year on year; net profit was 235 million yuan, down 38.01% year on year; net profit after deducting non-net profit was 207 million yuan, down 23.12% year on year. The corresponding company's 3Q23 operating income was 509 million yuan, up 9.48% from the previous month; net profit was 85 million yuan, up 18.49% from the previous month.
The results for the first three quarters of 2023 declined year-on-year due to product restructuring, and the 3Q23 performance improved month-on-month.
In the first three quarters of 2023, the company's “big varieties”/“small varieties” sector 1 revenue was 0.56/1,349 billion yuan, YoY was -80.41%/-5.97%, respectively; sales volume was 0.80/97,800 tons, and YoY was -76.95%/6.49%, respectively. The year-on-year decline in revenue was mainly related to the sharp decline in sales of various water reducing agents and the decline in prices of major products due to the company's optimized product structure. The average price of the company's “big variety”/“small variety” products in the first three quarters of 2023 was 6986.95/13795.27 yuan/ton, and YoY was -15.00%/-11.70%, respectively. In terms of raw materials, the average purchase price of ethylene oxide/propylene oxide in the first three quarters of 2023 was 5605.30/8618.37 yuan/ton, respectively, and YoY was -14.19/ -8.66%, respectively. In the first three quarters of 2023, the company's sales expense ratio was 0.50%, up 0.05pcts year on year; management expense ratio was 2.93%, up 0.16pcts year on year; financial expense ratio was -0.02%, up 1.59pcts year on year; R&D expense ratio was 3.86%, down 0.54pcts year on year. The company's net profit to its parent declined in the first three quarters of 2023. The net profit margin was 16.69%, down 5.31 pcts from the previous year. The main reason for this was a sharp decline in other income and asset disposal returns. Looking at a single quarter, 3Q23's gross sales margin was 25.80%, up 1.62pcts from the previous month. The main reason for this is the gradual increase in the share of sales of “small variety” products with high added value.
The company's net cash flow changed significantly in the first three quarters. Net cash flow from operating activities was $228 million, down 45.40% year on year; net cash flow from investment activities was -189 million yuan, down 427.64% year on year; and net cash flow from fund-raising activities was -112 million yuan, up 24.75% year on year. The balance of cash and cash equivalents at the end of the period was $563 million, a year-on-year decrease of 26.87%. Accounts receivable increased by 14.60% year over year, and the turnover ratio of accounts receivable decreased, from 7.48 in the same period in 2022 to 5.78.
Inventories fell 17.78% year over year, and the inventory turnover rate declined from 5.39 times in the same period in 2022 to 4.84 times.
The company actively adjusts the product structure and deeply cultivates the “small variety” market. The company has focused on special surfactant products for many years. Downstream covers many emerging application fields such as new material resins, silicone, lubricants and metalworking fluids, environmentally friendly coatings, new composite materials, new energy, and electronic chemicals. China's large variety of surfactants has formed a certain scale and can meet basic domestic needs. Some products can be exported to international markets, but there is still a huge gap between China and foreign countries in terms of small surfactants with high technical content and added value. Although China has developed some small types of surfactants with new functions in recent years, and some of these products are already in the pilot testing and application promotion stage, a large number of key technologies in China are still dependent on introduction, and the ability to innovate independently is poor. According to the company's 2023 mid-year report, small-variety products used in personal care, healthcare, food and other industries are the main growth points of the future specialty surfactant market. At the same time, the upgrading of environmental requirements and the diversification of customer needs also place higher demands on the performance of traditional large-variety products. The innovation capacity of China's surfactant industry still needs to be strengthened. Giving full play to the scientific research capabilities of enterprises, research institutes, institutions of higher learning, etc. is an important foundation for the future development of the industry.
The company has been deeply involved in the field of surfactants for many years. It has obvious advantages in technology and scale, and its product market competitiveness is high. According to the company's 2023 mid-year report, the company has an annual production capacity of nearly 300,000 tons of special surfactants. It is currently the leading specialty surfactant enterprise with a large production scale, a full range of varieties, and high technological content in China. New adhesive materials, silicone application sector, lubricant and metalworking fluid application sector, environmentally friendly coating application sector, water reducing agent application sector, printing and dyeing additives application sector, composite new material application sector, personal care application sector, agrochemical additives application sector, paper chemicals application sector, polyether industry Amines and high-end electronic chemicals application sector Wait 16 sections.
The company actively optimizes the product structure to achieve horizontal expansion between sectors and vertical expansion of sectors. In terms of large varieties, the company gradually withdrew from production in the water reducing agent sector, effectively increasing the profitability level of the company's products. In terms of small varieties, the company continues to be deeply involved in growing fields such as surfactants for wet electronic chemicals and new energy adhesives, etc., and continues to develop new varieties and sectors. According to the company's 2023 mid-year report, the company has successfully cultivated new profit growth points such as the resin sector for new adhesives, lubricants and metalworking fluid applications, etc., and application sectors such as polyetheramine and high-end electronic chemicals are in the accelerated development stage. We are optimistic about the company's product structure optimization strategy. As production of large products is reduced and the layout of small product segments such as new resins, polyetheramines, and high-end electronic chemicals accelerates, it is expected that the company's overall profit level will continue to rise.
The company made full use of the “three parts” of scientific research and continued to achieve technological breakthroughs. In terms of internal R&D, the company has high-level innovative R&D platforms such as national enterprise technology centers, national postdoctoral research workstations, provincial key enterprise research institutes, engineering technology research centers, and high-tech R&D centers, etc., and uses multiple platforms to conduct product research and development around 16 major product segments. In terms of cooperation with external research institutes and institutions of higher learning, the company has established close industry-university-research cooperation with Zhejiang University and other well-known institutions of higher learning and research institutes in the country, and has established good business and technical cooperation relationships with world-renowned enterprises such as Momotu and Dow Corning. With the support of the three scientific research forces, the company has made many breakthroughs in product development and developed special surfactants with independent intellectual property rights. According to the company's 2023 mid-year report, it has now developed more than 1,800 products and obtained many scientific research results. 1H23 added 22 nationally authorized invention patents, for a total of 167; 1 new internationally authorized invention patent, for a total of 16; and 2 new utility model patents, for a total of 39. We are optimistic about the company's strong scientific research platform and industry-university-research cooperation system. It is expected that the company will continue to develop new products with independent intellectual property rights in various sectors, and product competitiveness will be further enhanced.
The company's supply of raw materials is stable, providing a guarantee for production and operation. Ethylene oxide and propylene oxide are the company's main raw materials, but both are difficult to store for a long time, so establishing a stable supply chain of raw materials has become a key factor in guaranteeing the company's daily production. According to the company's 2023 mid-year report, the company has now established stable cooperative relationships with companies such as Sinopec Chemical Sales Co., Ltd., Sanjiang Chemical Co., Ltd., and Ningbo Zhenhai Refining and Chemical Liande Chemical Co., Ltd. for many years. The supplier's sufficient production capacity and reasonable transportation radius guarantee the company's supply of raw materials. We are optimistic about the stable cooperative relationship between the company and upstream raw material suppliers, which can guarantee the company's sufficient raw materials and the continuity of production.
The company's project construction is progressing steadily and is expected to open up a new revenue growth curve. According to the company's 2022 annual report, the company's ongoing construction projects include a new material project with an annual output of 30,000 tons of high-end surface functions, a polyetheramine technical improvement project with an annual output of 90,000 tons, a new polyetheramine technical improvement project with an annual output of 60,000 tons, a polyimide technical improvement project with an annual output of 200 tons, a new material resin and special industrial surfactant project, and a technical improvement project with an annual output of 5,000 tons of sodium methpropyl sulfonate. In terms of new construction projects, according to the company's interim report, construction of the “third factory” of Real Madrid's Kaimeike high-end functional new materials project has already begun, and the project plans to build a high-end functional new materials project with an annual output of 330,000 tons2. According to the “Notice Concerning Wholly-owned Subsidiaries Competing for Land Use Rights”, Real Madrid's Kaimeike won a land use right on a plot of land in the Shangyu Economic and Technological Development Zone in Hangzhou Bay with a total price of 73.02 million yuan on February 21, 2023. The project is progressing smoothly. We are optimistic that the company's projects under construction and new construction projects will gradually reach production, which will help the company improve its own industrial layout and achieve horizontal and vertical expansion of the product sector.
Investment suggestions: We expect Real Madrid Technology's revenue for 2023-2025 to be 20.48/27.34/3.391 billion yuan, up -6.18%/33.52%/24.02% from the previous year, and net profit of 3.42/4.87/625 million yuan respectively, up -28.30%/42.38%/28.42% from the previous year, corresponding to EPS of 0.58/0.83/1.06 yuan. Combined with the company's closing price on November 20, the corresponding PE was 20/14/11 times, respectively. We are optimistic about the company's product structure optimization strategy based on the following four aspects: 1) We are optimistic about the company's product structure optimization strategy. It is expected that the company's overall profit level will continue to improve as production of large products is reduced and the layout of small product segments such as new resins, polyetheramines, and high-end electronic chemicals accelerates. 2) We are optimistic about the company's strong scientific research platform and industry-university-research cooperation system. It is expected that the company will continue to develop new products with independent intellectual property rights in various sectors, and product competitiveness will be further enhanced. 3) We are optimistic about the stable cooperative relationship between the company and upstream raw material suppliers, which can guarantee the company's sufficient raw materials and the continuity of production. 4) We are optimistic about the gradual production of the company's ongoing projects and new construction projects, which will help the company improve its own industrial layout and achieve horizontal and vertical expansion of the product sector. First coverage, giving a “buy” rating.
Risk warning: risk of raw material price fluctuations, risk of demand falling short of expectations, environmental risk, production safety risk