Incident: The State Council issued a notice on the “Action Plan for Continuous Improvement of Air Quality”. The goal is that by 2025, the concentration of PM2.5 in prefecture-level cities and above nationwide will be reduced by 10% compared to 2020, the proportion of days with severe pollution and above will be kept within 1%; total emissions of nitrogen oxides and VOCs will be reduced by more than 10%, respectively, compared to 2020.

PM2.5 concentrations in Beijing-Tianjin-Hebei and surrounding areas (including Shandong Province and Henan Province) decreased by 20% and 15% respectively. Overall, PM2.5 concentrations in the Yangtze River Delta region met the standards, and Beijing kept it within 32 ug/m3.

Environmental protection is gradually becoming stricter, and the company is expected to benefit as an industry leader. The core of this “Action Plan for Continuous Improvement of Air Quality” is to require continuous improvement of air quality, reduction of heavily polluted weather, reduction of PM2.5 concentration, and reduction of nitrogen oxides and VOCs emissions. The plan clearly states that the key regions for implementation include Beijing-Tianjin-Hebei and surrounding regions, including Beijing, Tianjin, Hebei, Shandong, and the vast majority of Henan provinces, the Yangtze River Delta region, and the Fenwei Plain region. These regions are where cellulose ether production capacity is concentrated. According to Baichuan Yingfu statistics, the production capacity of cellulose ether in the above regions exceeds 800,000 tons, accounting for more than 70% of the country's total. The production of cellulose ether will produce a lot of VOCs, which require high investment in environmental protection equipment to avoid them. The implementation cycle of this action plan lasts for a long time until 2025. We expect that environmental high-pressure inspections will begin again. This will have a great impact on the commencement of construction by cellulose ether manufacturers in Beijing-Tianjin-Hebei and other regions that lack environmental investment. The vast majority of these small and medium-sized enterprises do not meet environmental protection standards. As the only listed company in the entire industry, Shandong Heda is also the number one leading enterprise in China. It has introduced advanced wastewater and exhaust gas treatment technology for a long time, with a total investment of nearly 400 million yuan. It is an enterprise that meets environmental protection standards, and the commencement of construction has not been affected.

The most stressful moment is over, and the company is about to enter the 2.0 stage of rapid development. The company achieved revenue of 428 million yuan in the third quarter, and its main business showed a year-on-year recovery. After entering the third quarter, the company's new cellulose ether plant began to gradually release production capacity, but at the same time, depreciation expenses also increased, so net profit in the third quarter was affected somewhat. In addition, financial expenses in the third quarter were high, mainly due to a decrease in exchange earnings and an increase in interest on convertible bonds. Overall, there have been significant improvements. It can be said that the company's various businesses are already recovering. In the future, the company will start lightly and enter the 2.0 stage of rapid development.

The new production capacity was gradually put into operation, once again starting rapid development. The company has a total production capacity of 85,000 tons of cellulose ether, including the current production capacity of 34,000 tons, 41,000 tons under construction (some production capacity is in the climbing stage), and 10,000 tons for Zhongfu. It is a leading domestic cellulose ether enterprise. At the same time, the company is also developing new customers in new application fields. These new products are more expensive and more profitable. In the field of plant capsules, the company is an integrated global industry chain company for plant capsules. Currently, the company has a production capacity of 35 billion capsules. With the removal of foreign capsules from inventory and returning to normalization, demand for vegetable capsules is expected to pick up, and the operating rate of production capacity will increase further. At the same time, the more expensive second-generation vegetable capsules have also been verified, and mass sales have begun. In the field of plant-based meat, at the end of this year, Mitega's production capacity of 10,000 tons of plant-based meat will soon complete equipment commissioning and be put into production. Plant-based meat products use high-end cellulose ether produced by the company, and the taste of the products is closer to the taste of the Chinese population. With the advantage of raw materials, the company is expected to profit from the price difference in the industrial chain and be more competitive among similar products. In the future, with large-scale production of plant-based meat production capacity, the company is expected to benefit both from selling cellulose ether and from obtaining shareholding income.

Maintain a “Highly Recommended” investment rating. It is estimated that the company's revenue for 2023-2025 will be 1,708 million yuan, 2.171 billion yuan and 2,855 billion yuan respectively, net profit of 280 million yuan, 395 million yuan and 553 million yuan respectively, and EPS of 0.82 yuan, 1.15 yuan and 1.62 yuan respectively. The current stock price corresponding to PE is 24.1 times, 17.1 times, and 12.2 times, respectively.

Risk warning: new project construction falls short of expectations, product sales volume falls short of expectations, poor environmental implementation, etc.