Incidents:

The company announced its 2023 performance forecast. It is expected to achieve net profit attributable to mother of 28,743.76-33,5532 million yuan in 2023, an increase of 100.00%-130.00% over the previous year; net profit after deduction of 25,544.76-29,856.32 million yuan, an increase of 126.94% to 165.25% over the previous year.

Comment:

The release volume of electronic detonator products, strong production and sales of industrial explosives, and a sharp rise in the volume and price of potassium perchlorate products led to a significant increase in performance.

As electronic detonators in the explosion industry completely replaced ordinary detonators, the company's electronic detonator business revenue and profit increased dramatically. In the first three quarters of '23, the company sold 23.1747 million rounds of electronic detonators, an increase of 195.65% over the previous year; in addition, industrial explosives also achieved strong production and sales. The company's potassium perchlorate business was developed by Yongning Technology, a holding subsidiary. In the first three quarters of '23, Yongning Technology achieved revenue of 170 million yuan and profit of 61.19 million yuan, up 89.2% and 303.37%, respectively. Benefiting from strict environmental protection policies in the potassium perchlorate industry, related companies in the same industry that did not meet environmental protection standards stopped production and limited production, and the company's potassium perchlorate production was not affected; moreover, the new products developed by the company for military and automobile airbags achieved stable mass production, which led to a significant increase in the company's potassium perchlorate business revenue and net profit. In addition, the company accrued goodwill impairment of $124.4971 million in the same period last year, which also had a certain impact.

The only civilian explosion production group in Jiangxi Province is expected to benefit from the demand for surrounding infrastructure projects such as the Zhejiang, Jiangxi, Guangdong Canal, etc. The company is the only civilian explosion manufacturer in Jiangxi Province. The channel covers Jiangxi Province and eastern Guangdong, and is expected to fully benefit from the implementation of infrastructure projects such as the Ruimei Railway, Changjiang Railway, and the Zhejiang-Jiangxi Guangdong Canal in Jiangxi Province during the “14th Five-Year Plan” period. Among them, the Zhejiang-Jiangxi Guangdong Canal is expected to invest 320 billion yuan overall, and Jiangxi Province accounts for 60% of the river section. As of 23H1, the company's industrial explosives production capacity was 174,000 tons, and industrial detonator production capacity was 49.8 million rounds.

Lay out the new military materials sector and advance in parallel. The company's military business is carried out by several subsidiaries. Among them, Aoke New Materials has a complete production line for tungsten alloy materials and new non-metallic fiber materials, and is the only domestic supplier of non-metallic LH wire clusters; Mitsuishi Nonferrous and Tuohong New Materials are engaged in tantalum-niobium hydrometallurgy processing, with an annual production capacity of 1,500 tons of tantalum-niobium compounds. Applications include tantalum capacitors or hard alloys, optical glass additives, acoustic surface filters, and 1.6T optical modules, military industry; Xinyu Cathay has independently developed drone rocket boosters, and has been mass-produced and delivered in batches for 23 years; the joint venture Shenzhou Zhihui MaxSim in the Army It has been widely used in the Navy, Air Force, Rocket Force, War Troops, Armed Police, and military industry groups.

The potassium perchlorate business achieved a sharp rise in volume and price. Yongning Technology, the holding subsidiary of the company, is a leader in the domestic potassium perchlorate field. The main reason is that the price of potassium perchlorate has risen sharply due to environmental factors; second, fireworks festivals and major events in related regions have intensified, and demand for high-end fireworks has increased significantly; third, it has increased product development and marketing efforts, and achieved breakthroughs in sales in automotive airbags and military applications. Currently, Yongning Technology plans to expand production capacity to further meet the needs of related industries at home and abroad.

Profit forecast, valuation and ratings: Cathay Pacific Group is the only civilian explosion manufacturer in Jiangxi. It benefited from the implementation of infrastructure projects in and around the province during the “14th Five-Year Plan” period. At the same time, new military materials benefited from increased downstream demand, while the potassium perchlorate business benefited from the release of high-end products, stricter environmental protection, and “ban restrictions” on fireworks and firecrackers. Maintain the 23-25 net profit forecast of 313/3.87/467 million yuan, corresponding EPS of 0.50/0.62/0.75 yuan, and corresponding PE of 19x/16x/13x, maintaining the “buy” rating.

Risk warning: risk of fluctuating raw material prices, risk of market competition, risk of high goodwill balance due to acquisitions.