There was a slight decline in full-year results. The company recently released its 2023 annual report. It achieved annual revenue of 753 million yuan, a year-on-year increase of 24.43%, and realized net profit of 43.55 million yuan, a year-on-year decrease of 7.41%, after deducting non-return net profit of 40.32 million yuan, an increase of 21.73% year-on-year. The company's annual gross profit margin was 13.11%, a year-on-year decrease of 0.27pct. The increase in the company's annual revenue was mainly due to the Hainall Phase II production line reaching production volume, and the reduction in non-recurring profit and loss such as government subsidies led to a slight year-on-year decline in overall net profit and loss.

Subsidiary projects reach production volumes, and cost optimization counteracts falling sales prices. The company's resin production increased by 28.91% year on year in 2023. Among them, pure polylactic acid resin production and sales increased 52.62% and 76.24% year on year respectively, but due to falling polylactic acid prices, the actual revenue increase was lower than the sales increase. However, due to the company's continuous optimization of the unit consumption of pure polylactic acid to polylactic acid, the unit cost of pure polylactic acid was also significantly reduced. As a result, the gross margin of pure polylactic acid increased by 1.1 pct year on year, but the gross margin of modified polylactic acid fell 5.6 pct year on year, and the overall gross margin still declined slightly. Judging from the product sales structure, the share of pure polylactic acid sales is constantly increasing, and more downstream customers are willing to directly purchase pure polylactic acid to make their own modifications, so future adjustments to the company's product structure will also help increase the overall gross profit margin.

The import tax rate adjustment may ease the pressure on import supply. The decline in polylactic acid prices is mainly due to the impact of policy adjustments and economic downturn in overseas markets, and demand contracted in the short term. As a result, some overseas products were sold domestically at low prices, increasing competition in the domestic market. However, since polylactic acid is not included in China's “2024 Tariff Adjustment Plan”, this may cause import tariffs on polylactic acid imported from countries or regions not subject to other preferential trade agreements to ease the pressure on import supply.

The fund-raising project has been postponed until the product is released. The two polylactic acid production lines with an annual output of 75,000 tons in the company's fund-raising project are to be implemented in two phases and are expected to be completed by March 2025 and September 2026, respectively. This adjustment is mainly due to the fact that the actual net amount of capital raised in the company's IPO was less than the amount of capital raised. In order to improve the efficiency of the use of capital raised, ensure the smooth development of fund-raising investment projects, and comprehensively consider factors such as the macro environment and market environment in recent years, the company took the initiative to slow down the investment and construction progress of fund-raising projects.

Due to the decline in sales prices of the company's main products and delays in fund-raising projects, and the sales volume of modified polylactic acid was lowered due to sales restructuring, we lowered the company's 2024-2026 earnings forecast to 0.33, 0.41, and 0.53 yuan respectively (the original 24-25 forecast was 0.67 and 1.04 yuan), and a target price of 9.90 yuan was given based on the 24-year average price-earnings ratio of comparable companies of 30 times, maintaining an increase rating.

Risk warning: raw material price increase; project progress; core technology leakage; increased market competition; changes in import tax policies.