Performance is under pressure due to fluctuations in lithium carbonate prices. Going overseas is expected to become the core focus. The company released its 23rd annual report, achieving operating income of 9.696 billion yuan in 23, -13.10% year-on-year, and achieving net profit of 2,092 billion yuan, or -50.79% year-on-year. Affected by fluctuations in the price of lithium carbonate, the net profit from the company's participation in Lanke Lithium was 1,294 billion yuan, -62.5% over the same period last year, causing significant pressure on performance.

In '23, the company's overseas business showed operational resilience, accounting for about 60% of revenue. Looking back, we think “going overseas” may be the core focus of the company's business. On the one hand, we judge that the overseas building materials sales business with high gross profit margin and high growth may gradually become the core variable catalyzing the company's performance growth and valuation; on the other hand, the main traditional building materials machinery industry is also expected to drive gradual improvement in profitability.

The release of production capacity is expected to support revenue growth in overseas building materials sales business

By business, the company's building materials machinery, overseas building materials sales, and lithium battery materials achieved revenue of 44.8 billion yuan, 36.6 billion yuan, and 740 million yuan respectively. Affected by the global economic slowdown and the downturn in the domestic real estate market, the building materials machinery business was under pressure, while the release of production capacity supported the overseas building materials sales business revenue to maintain good growth. By the end of '23, the company and strategic partners had set up 6 production bases in Africa, and had built 17 architectural ceramics production lines and 1 sanitary ware production line. In 2023, the production of architectural ceramics exceeded 150 million square meters, with sales volume of 142 million square meters, +22% and +18% year-on-year respectively. The cumulative output of the Ghanaian sanitary ware project had exceeded 470,000 pieces since it was put into operation in May '23. At present, the company's overseas building materials business has planned to achieve a revenue target of 10 billion dollars within 5 years. After all of the projects currently under construction are completed, the company is expected to produce an annual production capacity of more than 200 million square meters of architectural ceramics, 2.6 million pieces of sanitary ware, and 400,000 tons of building glass.

Profitability is under pressure, and there is still room for improvement in cash flow and balance and liability structure. The gross margin of the company in 23 was 29.2%, compared to -0.2%. Among them, the gross margins of building materials machinery, overseas building materials sales, and lithium battery materials were 28.4%, 35.7%, and 9.2%, respectively, +2.38, -7.63, and -7.3 pct year-on-year respectively. On the one hand, the recovery of international trade and the release of other local production capacity led to an increase in structural competition in some regions, leading to a decline in the gross margin of the overseas building materials business; on the other hand, foreign currency rate hikes led to large fluctuations in local currency exchange rates in Africa and China Long-term foreign currency loans have increased, causing large exchange losses. The year-on-year sales, management, R&D, and financial expense ratios were -0.03, +1.63, +0.09, and +2.15pct, respectively. Under the combined influence, the net interest rate was 26.9%, or -19.73% year-on-year. The net CFO of the company in '23 was 731 million yuan, -267 million yuan year on year, and the balance ratio was 42.01%, +5.04% year over year.

Optimistic about the growth of overseas building materials sales business. Maintaining a “purchase” rating takes into account that the company's profitability was pressured by factors such as exchange rate fluctuations and declining investment returns in Lanke Lithium in 23 years, but the overseas building materials sales business has maintained good growth, and it is expected that it will continue to benefit from the expansion of demand in the African building materials market. We lowered the company's 24-25 net profit forecast to 1.96 billion yuan and 2.08 billion yuan, and added a 26-year forecast of 2.43 billion yuan (the value was 2.4/24.01 billion yuan 24-25 years ago), -6.3%, +6.4%, and +16.6% year-on-year respectively, maintaining the “buy” rating.

Risk warning: Overseas competition intensifies, exchange risks, large fluctuations in lithium carbonate prices, geopolitical risks, and the progress of production capacity expansion falls short of expectations.