Key points of investment:
Company announcement: According to the company announcement, in 2023, the company achieved revenue of 3.455 billion yuan (YoY -1.78%), and realized net profit of about 296 million yuan (YoY -41%); of these, 23Q4 achieved revenue of 828 million yuan (YoY +0.9%, QoQ -14.1%), and realized net profit of 44.99 million yuan (YoY -41.4%, QoQ -9.9%), and realized net profit of 44.9 million yuan (YoY -41.4%, QoQ -9.9%) YoY -35.9%, QoQ -9.7%). Results were lower than expected due to year-end expense accruals and a month-on-month decline in revenue.
The company's additive sales in 2023 followed the increase in tire demand, and product prices declined due to raw materials and market factors, leading to a decline in overall profitability. According to the company's announcement, sales of high-performance rubber additives and multi-functional rubber additives increased by 21.7% and 3.5% to 11.74 and 104,300 tons respectively in 2023, mainly due to a recovery in downstream tire demand in 2023 after experiencing a downturn in 2021-2022, which led to an increase in demand for rubber additives. As a leading domestic additive company, the sales volume of all varieties increased.
However, the price of anti-scorching agents, the main profitable product, was affected by the supply side and the raw material side, and there was a decline, causing the gross margin of high-performance rubber additives to drop 8.29 pcts year on year, driving the overall gross margin down 5.36 pcts to 22.31% year on year. On the cost side, the sales expense ratio, and R&D expense ratio were generally flat year over year. Financial expenses increased by more than 30 million yuan year over year due to the reduction in exchange earnings and the calculation of debt conversion expenses. Furthermore, impairment losses on notes receivable increased by about 30 million yuan year on year, causing the overall net profit margin to drop 5.84 pct to 8.81% year on year.
The price of 23 Q4 anti-scorching agents still declined slightly, and in the previous 23Q3, sales of 23Q4 additives declined month-on-month due to the price of raw materials driven centralized procurement by customers. In addition, year-end debt conversion costs and management expenses were calculated, making profits less than expected. Currently, the price of anti-scorching agents has dropped significantly compared to the beginning of last year, but the current price of anti-scorching agents has stabilized, and it is expected that there will be limited room for subsequent decline. Prices of upstream raw materials such as aniline rose in the third quarter. At that time, price increases for some ordered products lagged behind, so some downstream customers concentrated on procurement in the third quarter, causing sales to decline in the fourth quarter. However, as prices followed the rise of raw materials, gross margin gradually rebounded, increasing 0.69 pct to 19.09% month-on-month. On the cost side, management expenses increased by nearly 10 million yuan month-on-month at the end of the year, and interest expenses in financial expenses were affected by interest on issuing convertible bonds, which increased by more than 17 million yuan month-on-month. Furthermore, credit impairment losses were accrued in the second and third quarters, and a decrease of 10 million yuan month-on-month in the fourth quarter, resulting in an overall net profit margin of 0.25 pct to 5.44% month-on-month.
There are plenty of projects under construction and products under development to drive future growth. According to the company's annual report, by the end of 2023, the company's projects under construction increased by 366 million yuan and 121 million yuan to 493 million yuan respectively compared to the beginning of the year and the end of September, mainly including the 6,000 ton accelerator DZ project, the 10,000 ton anti-scorching agent project, and the silane coupling agent project. In 2024, we expect the company's anti-coking agent to increase by 1000-2000 tons, insoluble sulfur by 20,000 tons, amino resin by 20,000 tons, and the 6,000-ton accelerator DZ project and silane coupling agent project to gradually be put into operation, contributing to the overall increase in 2024. In addition, high-value-added organic peroxides are scheduled to begin construction in 2024 and put into operation in the second half of 2025; laboratory research on additives related to lithium batteries will be carried out, and a tonne pilot production demonstration line for vinyl carbonate is expected to be completed in 2024. We believe that in a situation where cyclical fluctuations in the profits of traditional additives are gradually fading, more attention should be paid to the transformation of the company's results in new products, and it will blossom more in the future.
Profit forecast and valuation: Considering the gradual decline in the price profit of the main profit products from previous highs, the profit forecast for 2024-2025 was lowered, and the profit forecast for 2026 was added. The estimated net profit for the three years is about 3.5, 4.2 (the original forecast is 4.4 billion yuan, 490 million yuan), and 450 million yuan, corresponding to PE about 10, 8 times, and 8 times PE. Refer to the upstream tire company Hailide and Dengcheng Shares's average PE in 2024 (Wind agreed), and downgraded to a “gain” rating.
Risk warning: the commissioning of projects under construction falls short of expectations; sales of new products fall short of expectations; large fluctuations in raw materials affect profit levels