Incident: The company released an annual performance forecast for 2023. It is expected to achieve net profit of 0.95 to 115 million yuan, a year-on-year decrease of 82% to 85%; corresponding net profit of 0.5 to 0.67 million yuan, a year-on-year decrease of 89-92%; the estimated net profit for 23Q4 is 18.73 to 38.73 million yuan, +274% to +672% month-on-month, and 896 million yuan without net profit, +172% to +688% month-on-month. Non-recurring gains and losses are mainly government subsidies.

Profitability bottomed out and rebounded. 23Q1-3 gross margin/net margin was 13.45%/8.73%, -32.17/-26.90pct year-on-year. In 23Q3, the company's gross margin was 10.08%, -29.52/-0.97pct; deducted non-net interest rate fell to 1.08%, or -28.71/-0.78pct month-on-month, the lowest in history. According to Baichuan Yingfu data, raw material prices are currently declining. As of January 23, the price of silicon powder/ethanol was -17.7%/-7.5%; silane prices rose in the fourth quarter. 23Q4 Huadong silane coupling agent KH-550/KH-560/KH-570/A-171 average price was 2.7/3.8/2.5/20,000 yuan/ton, +10%/+19%/+2%/+6% compared with 23Q4 respectively. Increased spreads are expected to cause the company's profitability to bottom up.

Production capacity investment is progressing steadily. At the bottom of functional silane, the company is steadily promoting production capacity construction, and is expected to increase its market share through cost advantages. On December 12, '23, the company announced the “Technical Improvement and Capacity Expansion Project for New Silicone Materials with an Annual Output of 65,000 Tons”. The fund-raising project officially entered the commissioning stage. The company's production capacity was increased again, while further enriching the company's product matrix. The company's aerogel project is also progressing steadily, and the aerogel device for the “Special Silicone Material Project with an Annual Output of 23,000 Tons (Phase I)” is already being tested. In '24, the company also plans to put into operation the first phase of the “300,000 ton silicon-based and aerogel new materials project” at the Ningxia base. It will increase production capacity of trichlorosilane and produce silicon tetrachloride as a by-product to help the company's revenue grow further.

Investment advice: We have long been optimistic about the cost advantage of the company's industrial chain integration and the valuation increase brought about by entry aerogels, but the decline in the price of functional silane exceeded expectations. We lowered net profit to mother for 23-25 to 1.03/1.74 billion yuan, corresponding to the current PE of 44.5/26.4/13.3x, respectively, to maintain the “gain” rating.