Ping An's point of view:

We have been deeply involved in refrigerants for more than 20 years, and it is an elastic target in the upward cycle. Sanmei Co., Ltd. is a leading domestic refrigerant company with a relatively pure business, focusing on second-generation and third-generation refrigerants. The company was founded in 2001, spun off the upstream fluorite powder processing business in 2016, listed on the main board of the Shanghai Stock Exchange in 2019, and entered the field of fluoropolymers in 2020. It laid out new products such as LiFSi, electronic grade hydrofluoric acid, FEP, PVDF, LiPF6, etc., and began an integrated layout of fluorine chemicals. In 2024, third-generation refrigerant quotas were officially issued. The company obtained 2.78, 3.15, 5.15, and 0.63 million tons of quotas for mainstream R32, R125, R134a, and R143a, respectively, accounting for 11.6%, 19.0%, 23.9%, and 13.8% of the country's total quota. Mainstream varieties account for 16% of the total quota, ranking second in the country. The leading position is strengthened. It is expected to rebound in performance amid increased industry concentration and rising refrigerant prices.

Looking back at the fluorine chemical industry cycle, a new upward cycle will begin. The rise in the industrial boom from 2009 to 2011 was due to domestic treasury bonds driving demand; the 2012-2016 low adjustment, the European debt crisis and domestic real estate regulation slowed economic growth, and total HCFCs control was implemented; in 2017-2018, supply-side structural reforms and environmental protection became stricter, and tighter supply boosted refrigerant prices; in 2019-2023, macroeconomic performance was weak, and terminal demand was sluggish. There was an oversupply of refrigerants due to three-generation quota competition in 2020-2022. Looking ahead to the future market: In 2024-2026, the tight supply of fluorite continues, the total supply of third-generation refrigerants is under control, second-generation quotas have been drastically reduced (a cumulative reduction of 67.5% by 2025), the fundamentals of mainstream varieties have improved, and prices have already risen (according to Baichuan Yingfu, the price of R32 has risen by more than 40% since the beginning of 2024), and the performance of companies that account for a high share of the issued quota may have bottomed out well.

Total supply has been locked down, quota policies have been implemented, and head concentration has increased. The total amount of HFCs in 2024 (excluding R23) was locked at 746,000 tons, of which the export quota was about 406,000 tons, accounting for 54.4%. The total quota amounts for the major third-generation refrigerant varieties R32, R125, R134a, and R143a were 23.96, 16.57, 21.57, and 45,500 tons, respectively. The leading companies Juhua, Sanmei, Dongyue Group, Sinochem Blue Sky (Haohua), Yonghe Co., and Zibo Feiyuan (to be owned by Juhua Holdings) accounted for 30.7%, 16.0%, 10.5%, 13.1%, 7.6% and 7.4% of production quotas in 2024. 3 Up to 66.2%, respectively, 66.0% and 79.6% show obvious characteristics of high concentration. The trend of centralization will be further interpreted as quotas are gradually reduced in the future.

The supply and demand pattern for mainstream third-generation refrigerant varieties may be reversed. 1) R32 accelerates the replacement of R22 and R410a as the main refrigerant in the domestic air conditioning market, and there is still a large room for improvement in the maintenance market. In 2024-2026, domestic supply of R32 stabilized at 142,000 tons, or there was a large supply and demand gap of 0.5-15,000 tons; 2) R125 is still in high demand as a raw material for various refrigerants such as mixed R404A/R407C/R410A/R507, but considering the risk that these refrigerants will gradually be replaced by R32, R134a, etc. The year-on-year decline is expected to show a weak balance where supply slightly exceeds demand in the short to medium term; 3) R134a still accounts for the main share of the automotive refrigeration market. Demand for R134a continues to expand. With domestic supply of R134a stabilized at 82,600 tons in 2024-2026, there will be a tight balance in the short term. There may be a gap between supply and demand in the medium term, and there is a risk of being replaced by R1234yf in the long term.

Profit forecast and investment suggestions: As a leading supplier of pure domestic refrigerants, Sanmei Co., Ltd. received a high quota in the total production of third-generation refrigerants issued in 2024. As the total supply of HFCs is controlled, industry fundamentals are expected to improve, the long-term boom cycle of the fluorine chemical industry begins, and the prices of mainstream refrigerant varieties rise. The company is expected to achieve a good performance rebound in the upward cycle. At the same time, under the trend of increasing concentration in the refrigerant industry, the company's leading position will also be strengthened. It is predicted that in 2023-2025, the company will achieve revenue of 35.33, 43.70, and 5.210 billion yuan, with net profit attributable to mother of 313, 7.05, and 811 million yuan respectively, corresponding EPS of 0.51 yuan, 1.15 yuan, and 1.33 yuan respectively. Corresponding to the closing price of PE on March 4, 2024, it is 84.7, 37.6, and 32.7 times, respectively. For the first time, coverage was given a “recommended” rating.

Risk warning: 1) Oversupply pressure: In the early stages, enterprises had surplus production capacity due to a sharp expansion of competitive quotas. Subsequent quota control was officially implemented. If market supply is still relaxed, it may have a certain impact on expectations of improving corporate profitability. 2) Risk that downstream demand falls short of expectations: If demand for terminal air conditioners, refrigerators, automobiles, etc. continues to weaken, it will adversely affect the fluorine chemical refrigerant industry. 3) Risk of large fluctuations in the price of raw materials such as fluorite: If the price of fluorite, the upstream core raw material, fluctuates greatly, it may have a big impact on the profit of refrigerant products. 4) Risk of refrigerant prices falling back: If the market supply and demand structure does not improve as expected, the surge in refrigerant prices in the early stages may fall rapidly in the future, thereby affecting the company's performance.