Incident: On December 28, the company issued two announcements: (1) the 0.038 million ton “bidirectional stretch polyester film production base construction project” built by the company using fund-raising funds has completed the main construction, equipment installation, commissioning, etc. and has entered the test phase; (2) the company plans to invest in the construction of a 350 tons/year M-grade carbon fiber project in Qiantang New Area of Hangzhou, with a total project investment of 1 billion yuan.

Optical film production capacity is about to be released, and there is plenty of room for domestic replacement. The company used fund-raising funds to build a 0.038 million ton production line. The equipment came from Dornier in Germany. Since then, it mainly produces substrates used in the field of optical film, including release base films for optical grade polarizers, protective base films for optical grade polarizers, and optical grade touch screen (ITO) protective film substrates, etc. Optical grade poly film has excellent optical properties such as low haze and high light transmittance, and is currently one of the products with the highest technical threshold in the polyvinyl acetate film segment. Currently, China has relied on imports for optical film substrates for a long time, and there is plenty of room for domestic replacement. With the gradual release of optical film production capacity, the proportion of high-value-added products in the company's product structure is expected to increase further, enhancing the company's market competitiveness while improving profit levels. In addition, the 0.035 million ton production capacity built by the company using its own capital entered the test phase in August 2023. After the production capacity is released, the company's existing production capacity will be expanded to help increase the company's market share.

The M-grade carbon fiber technology team is strong and is expected to strengthen the company's advantages in the field of new materials and achieve strong alliances.

The company plans to invest in the construction of M-grade carbon fiber. The partners are Langfang Hengshou New Material Technology Co., Ltd. and Xiu Lei (technical team representative), respectively. The total investment amount of the project is 1 billion yuan, of which 0.458 billion yuan has been invested in fixed assets. Currently, the company's direct or indirect shareholding ratio is 75%, and Hengshou New Materials's direct or indirect shareholding ratio is 25%. Subsequent company shares may be diluted due to factors such as equity incentives and financing, but they are guaranteed to be the controlling shareholder. Mr. Xiu Lei's technical team has mature experience in graphite fiber project management, and has mastered all the technology and production practices required to complete the graphite fiber project. It is expected to complement the company's deep industrial advantages accumulated over the years in the field of new materials.

Graphite fiber is a key material for aerospace equipment production, and foreign manufacturers account for most of the share. Carbon fiber and its composites are strategic emerging materials. Downstream applications cover fields such as fan blades, aerospace, and high-end automobiles. Among them, high modulus carbon fiber can adapt to space environments with extreme temperature differences between day and night due to its advantages of low density, high strength, high modulus, and low thermal expansion coefficient, and is one of the important materials in the aerospace field.

Currently, the global graphite fiber market is mainly monopolized by a few Japanese and American companies. Relying on this carbon fiber project, the company will actively promote exploration, development and industrial layout in the field of high-performance graphite fiber, collaborate with the main business and help replace domestic products.

Investment advice and valuation: In line with the company's third quarter results announcement, we adjusted our profit forecast for 23-25. We expect the company to achieve sales revenue of 0.397/0.541/0.669 billion yuan in 2023-2025, respectively, with a growth rate of -21.2%/36.4%/23.7%. Net profit attributable to mother was 0.032/0.069/0.104 billion yuan, respectively, with growth rates of -50.8%/115.1%/49.7%, respectively. Corresponding PE is 76X, 35X, and 24X respectively. Maintain an “overweight” investment rating.

Risk warning: Risk of fluctuations in upstream raw materials, increased risk of market competition, risk of absorption of new production capacity, risk of product development falling short of expectations, risk of proposed projects progressing less than expected.