Incidents:

Keda Manufacturing released its annual report for the year 23. The company achieved revenue/net profit/net profit after deducting non-net profit of 97/21/1.9 billion yuan, respectively, or -13%/-51%/-55% compared with the same period last year. In 23Q4, the company achieved revenue/net profit/net profit after deduction of non-net profit of 27/1/100 million yuan, respectively, +2%/-89%/-111% year-on-year. Overseas business accounted for about 60%/71% of revenue and gross profit in '23. The company plans to pay a dividend of 0.33 yuan/share (tax included), with a dividend ratio of about 3.1%.

Comment:

The drop in lithium prices put pressure on performance, and the gross margin of the overseas building materials business declined in the second half of the year. The sharp drop in the price of lithium carbonate caused the net profit of the participating company Lanke Lithium to -62.5% year-on-year. In '23, Lanke Lithium contributed about 1.3 billion yuan to the company's net profit, a year-on-year decrease of about 2.2 billion yuan, leading to a significant decline in the company's performance in '23. In 2023, the company's overseas building materials business achieved revenue of 3.66 billion yuan, an increase of 11.6%; the company's production of construction ceramics exceeded 150 million square meters, an increase of 22%; affected by the resumption of international trade and transportation, the release of local production capacity and rising financial expenses, etc., the gross margin of the overseas building materials business fell to 35.7%, a decrease of 7.6 pcts. In the second half of '23, the overseas building materials business achieved revenue of 1.75 billion yuan, a decrease of 0.1%, gross margin of 27%, and a decrease of 15.9pcts.

In 2023, the company's building materials and machinery business achieved revenue of 4.48 billion yuan. The downturn in the real estate market affected demand for construction, with revenue -20.2%; the company strengthened overseas sales channels and parts supply capacity through mergers and acquisitions and established offices, and actively transformed service providers. Overseas orders accounted for more than 55% in 2023, and orders from India, Southeast Asia, Central Asia and other regions grew well. The gross margin of the building materials machinery business was 28.4% in 2023, an increase of 2.4 pcts. Affected by the supply and demand relationship and price decline in the anode materials industry, the company's anode materials business achieved revenue of 740 million yuan in 2023, or -38.9% year-on-year, gross margin of 9.2%, a decrease of 7.3 pcts.

Profit margins are falling under pressure and are expected to bottom up: affected by the decline in gross margin of the overseas building materials business and lithium battery materials business, the company's gross margin in 2023 was 29.2%, a decrease of 0.2 pcts; the period expense ratio was 19.3%, up 3.8 pcts; among them, the sales/management/finance/R&D expense ratio was 4.9%/8.8%/2.6%/3.0%, and the sales expenses ratio also decreased by 0.03 pcts. The establishment of overseas sales channels has increased the management fee ratio. Bank loan balances have increased due to the expansion of production lines, compounded by the increase in interest expenses and exchange gains and losses under the continuous interest rate hike in the US dollar, which has led to a significant increase in the company's financial expense ratio. The decline in return on investment and the increase in the cost ratio of Lanke Lithium caused the company's net interest rate to fall by 19.7 pcts in 23 to 26.9%. In addition, net operating cash flow in '23 was $730 million, down 26.7% from the same period.

Overseas building materials production increased, and Lanke Lithium's production capacity increased to 40,000 tons: the company continues to expand the overseas building materials business, expanding the building materials category from ceramics to sanitary ware, and will further expand to glass. The Kisumu ceramic sanitary ware production project in Kenya was put into operation in January 2024, and construction glass production projects in Cameroon and Côte d'Ivoire, and construction glass production projects in Tanzania and Peru in South America are under construction. The production capacity of overseas building materials is expected to continue to increase, driving the company's rapid growth in performance. In 2023, the production and sales of Lanke Lithium, a subsidiary of the company, all increased. The production and sales volume of lithium carbonate was about 36/38,000 tons, +16%/+26% over the same period; Lanke Lithium now has a total capacity of 40,000 tons/year lithium carbonate production capacity, and the maximum daily output has exceeded 140 tons. As the price of lithium carbonate gradually stabilizes, Lanke Lithium, which has a cost advantage, will continue to bring a stable return on investment to the company.

Profit forecasting, valuation and rating: Considering the decline in the gross margin of the overseas building materials business after the epidemic and the uncertainty brought about by the rapid expansion of overseas business (such as exchange gains and losses and exhibition risks, etc.), we lowered the company's 24-25 net profit to 1.92 billion yuan (18%/11%, respectively), and increased the 26-year net profit forecast to 2.39 billion yuan. We are still optimistic about the company's expansion and the development logic of the overseas market. We are optimistic about the development of the company's three main businesses and maintain the “gain” rating.

Risk warning: The price of lithium carbonate continues to fall, environmental requirements increase the cost of lithium extraction; the growth rate of demand for building materials in Africa falls short of expectations; domestic economic recovery and carbon reform are falling short of expectations.