Incidents:

On November 30, 2023, the company announced the 2023 restricted stock incentive plan (draft). It plans to grant 11.2444 million restricted shares to incentive targets, accounting for about 1.50% of the company's total share capital of 749.623,800 shares as of September 28, 2023. Among them, 10.134 million shares were granted for the first time, accounting for 1.35% of the company's total share capital, accounting for 90.12% of the total equity granted; 1,1104 million shares were reserved, accounting for 0.15% of the company's total share capital; and the reserved portion accounted for 9.88% of the total equity granted.

According to PR Newswire, in December 2022, American Industrial Group 3M announced that it would withdraw from production of perfluoroalkyl and polyfluoroalkyl substances (PFAS) and stop using PFAS in its product portfolio by the end of 2025. PFAS is a type of artificial chemical with an alkyl chain as a framework where hydrogen atoms are partially or completely replaced by fluorine atoms. It is widely used in semiconductors, energy storage power plants, and data centers. The annual net sales of PFAS produced by 3M are approximately US$1.3 billion, and the total pre-tax expenses incurred during the exit process are estimated to be US$1.3 billion to US$2.3 billion. According to Reuters, in September of this year, 3M announced that it would speed up the process of discontinuing PFAS production at the Belgian factory.

Investment highlights:

3M discontinued PFAS production, and the global electronic fluoride market ushered in major changes

3M is one of the largest fluorine chemical manufacturers in the world. Its fluorine chemicals division has two factories in Belgium and the United States. The production brands are FluorinerTTM and NovECTM respectively. Among them, the Belgian factory mainly produces perfluorocarbons for semiconductor equipment cooling, data center immersion cooling, and overseas military insulation tests; the US factory mainly produces hydrofluoroether, which is used as a consumer electronics cleaning liquid. The fluorocarbon bonds of perfluorocarbons are extremely stable, so it is almost impossible for them to naturally degrade in the natural environment. They persist for a long time as persistent organic pollutants (POPs) and are important perfluoroalkyl and polyfluoroalkyl substances (PFAS). On the other hand, as a coolant for semiconductor etching processes, perfluorocarbons are one of the key raw materials for semiconductor manufacturing. Currently, 3M's share of the global semiconductor coolant market is 90%, and Belgian factories account for 80% of global coolant production. Downstream customers include TSMC, Samsung, SK Hynix, and Intel. It is expected that the discontinuation of 3M production may cause a large-scale shortage of electronic fluoride solutions.

Perfluoropolyether may become the first choice for electronic fluorinated liquids, and domestic manufacturers have completed the preliminary layout

As global regulations on PFAS are strengthened, market demand for PFAS replacement products continues to grow. In this context, perfluoropolyether (PFPE) is expected to gradually replace perfluoroalkanes and become the material of choice for semiconductor coolants. Perfluoropolyether (PFPE) is a type of polymer with different relative molecular masses containing only the three elements carbon, fluorine, and oxygen. 1) Compared with hydrocarbon polyether compounds, fluorine elements all replace hydrogen in hydrocarbon compounds, due to the strong electronegativity of the fluorine atoms. The fluorocarbon bond energy is higher than that of the hydrocarbon bond. The shielding effect of the fluorocarbon-fluorocarbon bond in the perfluoropolyether molecule on the carbon-carbon bond and the carbon-oxygen bond causes perfluoropolyether to have excellent chemical stability, oxidation resistance and corrosion resistance. 2) Compared with conventional fluorocarbon materials, due to the introduction of oxygen in perfluoropolyether, the ether-bond structure has better biodegradability and lower toxicity than the carbon carbon structure, so it is an ideal material to replace traditional fluorocarbon compounds.

In order to cope with the global shortage of electronic fluoride liquids, Chinese enterprises are speeding up their deployment. At present, Xinzhoubang has achieved production capacity layout and intellectual property layout, built a large-scale electronic fluoride production line, and commercialized Boreaf perfluoropolyether electronic fluoride liquid series products. Such products can be used in semiconductor chiller cooling, data center immersion cooling, precision cleaning, gas phase welding, and electronic leak detection.

Xinzhoubang is already supplying mainstream semiconductor manufacturers around the world, and may enter a rapid release stage next year

As of mid-2023, the company's organic fluorine chemicals production capacity is 2781 tons/year (January-June 2023 data), and the production capacity under construction is 22,000 tons/year. The Haysford High-end Fluorine Fine Chemicals Project (Phase II) was put into operation in the third quarter of 2023, and some production lines of the Heatherford High Performance Fluorine Materials Project (Phase I) will be put into operation in the fourth quarter of 2023. The overall project is expected to reach the intended usable state by February 28, 2024. The main products of the Heidelford (Phase I) project are tetrafluoroethylene and hexafluoropropylene, which are fluorine-containing monomers. They are important raw materials for the synthesis of fluoropolymers and fine chemicals. They form synergy and complementarity with the Haysford (Phase II) project to ensure the supply of raw materials while giving full play to the advantages of downstream products with high added value. In addition, the Sanming Haysford High-end Fluorine Fine Chemicals Project (Phase III) with an annual output of 30,000 tons will officially begin construction in 2024, with a construction cycle of 3 years.

In 2022, the company's perfluoropolyether coolant products were selected into the promotion list of key new products in Fujian Province.

At present, the company's production capacity of perfluoropolyether coolant has reached thousands of tons, and has supplied the world's mainstream semiconductor manufacturers. At the same time, the process routes are green and clean. It is expected that the 3M supply gap will be filled with a first-mover advantage. With the commissioning of production capacity and the gradual release of products, it is expected to further increase the company's performance and expand its global share.

Profit forecasts and investment ratings are based on prudential principles, and dilution factors and the impact of the acquisition of shares issued in this issue will not be considered for the time being. It is estimated that the company's net profit from 2023-2025 will be 11.05, 16.14, and 2,219 billion yuan respectively, corresponding to PE 30, 21, and 15 times. The company is the leading electrolyte in China. Fluorine Chemical has begun the second growth curve, considers the company's future growth, and maintains a “buy” rating.

The implementation of risk warning policies, the progress of new production capacity construction falls short of expectations, the performance of new production capacity contributions falls short of expectations, fluctuations in raw material prices, changes in environmental protection policies, and a sharp decline in the economy.