occurrences

On March 25, 2024, the company published its 2023 annual report.

Key points of investment

Revenue and profit declined, and the share of overseas building materials revenue rapidly increased in 2023 to 9.696 billion yuan, -13.1% year on year; net profit to mother was 2,092 billion yuan, -50.79% year on year; gross margin was 29.24%, -0.21pct year on year; net margin was 26.9%, year on year - 19.73 pct year on year.

The company's building materials machinery, overseas building materials, and lithium battery materials business accounted for 47.4%, 37.7%, and 7.6% respectively. Among them, the share of revenue from the overseas building materials business increased significantly, up 8.3 pcts from 2022. By region, the company's foreign revenue in 2023 was 5.814 billion yuan, accounting for 60%, an increase of 4.39 pcts over the previous year.

Overseas building materials: The revenue scale continued to grow, and the “ceramic+sanitary ware+glass” structure gradually formed. In 2023, the company's overseas building materials business achieved operating income of 3,655 billion yuan, an increase of 11.59% over the previous year; the gross margin was 35.70%, -7.63 pcts year on year. The main reasons for the decline in the gross margin of the company's overseas building materials business are: 1) the weakening of local purchasing power due to currency depreciation in some African countries; 2) the resumption of international trade and transportation and the release of production capacity from other local parties; 3) the removal of inventories from China and India, leading to regional structural competition; 4) exchange gains and losses due to fluctuations in foreign currency prices. By the end of 2023, the company had operated 6 factories in five countries in Africa, had 17 production lines for architectural ceramics and 1 production line for sanitary ware, and had produced more than 150 million square meters of architectural ceramics products in 23 years. Furthermore, after all existing projects under construction are completed, the company is expected to produce an annual production capacity of over 200 million square meters of architectural ceramics, 2.6 million pieces of sanitary ware, and 400,000 tons of construction glass. We believe that the company has established a high competitive barrier in the African ceramics market, and that the “ceramic+sanitary ware+glass” business structure built by the company is gradually being formed, and the revenue scale of the overseas building materials business is expected to continue to increase in the future.

Building materials machinery: The gross margin bucked the trend, and industrial chain mergers and acquisitions accelerated the in-depth development of the company's building materials machinery business to achieve operating income of 4.477 billion yuan, a year-on-year decrease of 20.16%; gross profit margin was 28.39%, +2.38pct year-on-year. In 2023, the company's pottery business accounted for more than 55% of overseas orders. As the domestic real estate market continues to bottom out and demand for pottery machines weakens, the company actively increased overseas revenue to drive the gross margin of the building materials machinery business to grow against the trend. In 2023, the company continued to lay out overseas business and completed two industrial chain mergers and acquisitions: 1) In July 2023, the company expanded the overseas accessories and consumables service market by participating in Guocera Kanglitai, a leading domestic ceramic glaze company; 2) In September 2023, the company acquired Italian press abrasives company FDS to strengthen local resource integration capabilities in Europe. We believe that the company's strategy is in line with market logic, actively expanding overseas markets and strengthening the in-depth development of the industrial chain, which can enhance the company's competitiveness in the global pottery market and help the company accelerate its transformation into a “global architectural ceramics manufacturer and service provider”.

Lithium battery materials and equipment: lithium carbonate price fluctuations, performance under phased pressure, and production capacity equipment was upgraded 1) Anode materials: In 2023, the company's anode materials business revenue was 740 million yuan, down 38.8% year on year; gross profit margin was 9.16%, down 7.3 pct year on year. Affected by industry supply and demand and price declines, the gross margin of the company's anode materials business is under phased pressure. 2) Lithium battery materials: In 2023, Lanke Lithium had operating revenue of 6.335 billion yuan and net profit of 2,969 billion yuan, a year-on-year decrease of 44.9% and 62.5%, respectively; contributed 1,294 billion yuan to the company's net profit to mother, a year-on-year decrease of 2,156 billion yuan. At the end of 2023, Lanke Lithium already had a total lithium carbonate production capacity of 40,000 tons/year. Compared with 30,000 tons/year at the end of 2022, the production capacity plant was upgraded again. The decline in Lanke Lithium's performance was mainly due to sharp fluctuations in lithium carbonate prices. Terminal prices in the lithium carbonate market continued to drop by about 500,000 yuan/ton from the beginning of 2023, and fell below 100,000 yuan/ton at the end of 2023. We believe that Lanke Lithium has a significant cost advantage. Despite large fluctuations in the price of lithium carbonate in '23, it can still contribute rich net profits, and its operational resilience is remarkable. We believe that the company has the ability to develop through cycles. In the future, as lithium carbonate prices stabilize and production capacity increases, we are optimistic that Lanke Lithium will continue to bring rich returns to the company.

Profit forecasting and valuation

The company's 2023 performance growth rate was greatly affected by factors such as exchange rates, lithium battery price fluctuations, and price reductions in overseas markets. We believe that the restrictions over 2024 are expected to be mitigated. The company's net profit for 2024-2026 is estimated to be 1.9 billion yuan, 2.2 billion yuan, and 2.5 billion yuan, respectively, corresponding to EPS of 0.97 yuan in 2024, maintaining a “buy” rating.

Risk warning

Competition in overseas markets intensifies; domestic demand for building materials and machinery has declined; risk of exchange rate fluctuations.