The company disclosed its 2023 annual report: achieved revenue of 9.696 billion yuan, -13.1% year-on-year, net profit of 2.092 billion yuan, or -50.79% year-on-year, after deducting non-net profit of 1,889 billion yuan, or -55.4% year-on-year. Among them, 23Q4 achieved revenue of 2,668 billion yuan, +1.64% year over year, net profit to mother of 73 million yuan, -88.82% year over year, deducted non-net profit of -75 million yuan, and -111.43% year over year. The annual gross profit margin was 29.24%, year-on-year -0.20pct, net profit margin 26.90%, year-on-year -19.73pct; of these, 23Q4 gross profit margin was 23.8%, year-on-year -7.05pct, net profit margin -0.95%, and -33.73pct yoy. The company plans to pay a cash dividend of 623 million yuan, with a dividend rate of 29.78% (30.68% in 2022), which is basically stable.

“Big Building Materials” is booming overseas, deepening production capacity, categories, and regional layout. The company's overseas building materials business revenue was 3,655 billion yuan, +11.59% year over year; gross profit margin was 35.70%, -7.63 pct year on year. Affected by currency depreciation in some African markets, as well as the recovery of international trade and inventory removal in China and India, local production capacity has been impacted to a certain extent, and the company's gross margin for overseas building materials has declined. However, the population size and urbanization of the African market continue to develop, and the company's business and production capacity have maintained growth resilience. By the end of the reporting period, the company had operated 6 factories, 17 production lines for architectural ceramics, and 1 production line for sanitary ware in 5 countries in Africa. During the year, ceramic production exceeded 150 million square meters, +21.96% over the same period last year. In addition, the Kenyan sanitary ware production project was put into operation in January '24. Ceramic production projects in Cameroon and Côte d'Ivoire, glass production projects in Tanzania and South America and Peru are under construction, and preparations are being made for the American Honduras ceramics production project. After the current construction project is completed, the annual production capacity is expected to exceed 200 million square meters of ceramics, 2.6 million pieces of sanitary ware, and 400,000 tons of construction glass.

The simultaneous expansion of overseas building materials led to an increase in foreign currency loans, while foreign currency interest rates continued to rise, causing the company to incur interest expenses of 213 million yuan in 2023 (108 million yuan in '22) and exchange losses of 108 million yuan (-35 million yuan in '22). Financial expenses +384% reached 254 million yuan over the same period last year, and the financial expenses ratio of +2.15 pct compared to the same period last year was 2.62%.

Accelerate the overseas layout of machinery and expand the advantages of the industrial chain

The company's building materials machinery business had revenue of 4.477 billion yuan, -20.16% year over year, gross profit margin of 28.39%, +2.38pct year on year, of which overseas orders from the pottery business accounted for more than 55%. Although the domestic machinery business is affected by the real estate and ceramics markets, the company's orders in India, Southeast Asia, Central Asia and other regions have grown well, and breakthroughs have been achieved in the Italian, Indian and Vietnamese markets. The company expanded its advantages in the industrial chain, participated in Guocera Kanglitai in 2023, acquired Italian mold company FDS, and developed the European market for accessories and consumables. Accelerate overseas layout, build Turkey's BOZUYUK factory, Indonesian subsidiary, Eastern Europe and Mexico offices, etc., and strengthen overseas service networks and spare parts supply capabilities.

The impact of fluctuations in investment income is in line with expectations. Lanke Lithium continues to contribute cash flow, and Keda accounts for 43.58% of Lanke Lithium's shares, and the profit contribution is reflected in investment income. Lanke Lithium contributed 1,294 billion yuan to the company's net profit in 2023, compared with 2.156 billion yuan in the same period last year. Lanke Lithium's technical improvement project to improve quality and stabilize production has been completed and put into operation. The overall recycling rate of lithium resources has increased by about 5 pct. Annual production and sales have increased year-on-year, and the production capacity of lithium carbonate has reached 40,000 tons/year. However, the price of lithium carbonate continued to drop from about 500,000 yuan/ton at the beginning of '23 to 100,000 yuan/ton (end of December). Prices continued to decline throughout the year, and the market already anticipated the impact on Keda's profit growth rate.

Investment advice: We are optimistic that the company's three major businesses, building materials, machinery, and lithium batteries, will resonate and flourish overseas. The leading position of pottery machines is stable, deepening the ceramic industry chain, going overseas to explore growth dividends, actively lay out the African ceramic industry, and expand the categories of sanitary ware and glass. At the same time, lithium battery materials and lithium battery equipment are progressing in an orderly manner, extending the lithium battery new energy business and developing new growth poles. We expect the company's net profit to be 17.2, 19.2, and 2.20 billion yuan in 2024-2026, and the current price corresponding to PE is 12, 11, and 9 times, maintaining the “recommended” rating.

Risk warning: the risk of too many new production lines in Africa and increased competition; the risk of excessive exchange rate changes; the risk of a rapid decline in domestic demand for building materials and machinery; and the risk of sharp fluctuations in lithium carbonate prices.