Yanggu Huatai released its 2023 annual report. In 2023, the company achieved operating income of 3.455 billion yuan, a year-on-year decrease of 1.78%; realized net profit withheld from mother of 296 million yuan, a year-on-year decrease of 41.39%.

The decline in revenue in 2023 was mainly due to lower prices for high-performance rubber products and increased preparation for bad debts received on unexpired commercial acceptance notes. 1) By product, the revenue of high-performance rubber additives and multifunctional rubber additives in 2023 changed -9.06%, 12.33% to 20.77 and 1,368 billion yuan, respectively; gross margin changed by -8.29, 0.45 percentage points to 22.99% and 21.19%, respectively; sales volume changed 21.73%, 3.49% to 117,500 tons and 104,300 tons, respectively. The average sales price changed by -25.29% and 8.54% to 17,700 yuan/ton, respectively. 2) In 2023, the company's gross sales margin and net sales margin were 22.31% and 8.81%, respectively, with year-on-year changes of -5.36 and -5.84 percentage points, respectively. 3) The three cost rates increased 0.84 percentage points year over year to 7.46%. Among them, sales, management (excluding R&D), and financial expense ratios changed 0.33, -0.51, and 1.02 percentage points year on year to 2.09%, 5.08%, and 0.29%. In 2023, the company's R&D expenses accounted for 2.44% of revenue, up 0.21 percentage points year on year.

The company's equipment is running steadily, and production capacity is abundant under construction. We are optimistic about the long-term growth brought about by production capacity investment.

According to the company's 2023 annual report, the design production capacity of the main rubber additives products in 2023 is 200,000 tons/year, the capacity utilization rate is 112.46%, and a high-performance rubber additive and by-product recycling project with an annual output of 65,000 tons is under construction. The company expects 10,000 tons of adhesives, an annual output of 65,000 tons of high-performance rubber additives, and by-product recycling projects to be put into operation in 2024. The starting progress of the 90,000 tons/year rubber additive project, the 6,000 tons/year accelerator DZ production unit, the 10,000 tons/year rubber anti-scorching agent CTP production plant, the 65,000 tons/year high-performance rubber additive and by-product resource recycling project, and the 40,000 tons/year trichlorosilane co-production 6,500 tons of silicon tetrachloride project were 46%, 83%, 47%, 11%, and 11%, respectively.

In 2023, the company issued convertible bonds for a recycling project with an annual output of 65,000 tons of high-performance rubber additives and by-products. The company plans to issue convertible bonds to raise a total capital of RMB 650 million. After completion, it will develop a production capacity of 55,000 tons/year of silane coupling agents and 10,000 tons/year of recycling by-products. The company is expected to achieve average annual sales revenue of 813 million yuan and net profit of 107 million yuan.

Profit forecasting and investment evaluation. We expect Yanggu Huatai's net profit to be RMB3.55, 4.04, and 454 million yuan in 2024-2026, corresponding to EPS of 0.87, 0.99 and 1.11 yuan respectively. Taken together, we gave Yanggu Huatai a valuation range of 12-14 times PE in 2024, corresponding to a reasonable value range of 10.44-12.18 yuan, maintaining a “superior to the market” investment rating.

Risk warning. Investment in production capacity under construction fell short of expectations; the macroeconomic economy declined; market prices of raw materials fell.