2023 full-year results are in line with market expectations
The company announced full-year results for 2023, achieving operating income of 14.49 billion yuan (YoY -27.6%), achieving profit before tax of approximately RMB 653 million (YoY -87.3%), and the polymer materials/refrigerant/silicone/PVC and caustic soda businesses achieved profit before tax of $3.37/3.11/-3.31/248 million, respectively. The company's net profit for 2023 was approximately RMB 611 million (YoY -85.4%) and achieved comprehensive profit attributable to listed companies of RMB 708 million (YoY -81.6%). The company's 2023 gross margin was 16.8% (YOY-15.7ppt) and net margin was 4.9% (YOY-14.4ppt). The company's 2023 annual results are in line with market expectations. It is proposed to pay a dividend of HK$0.1 per share. Mr. Fu Jun of Xinhualian has resigned as the company's executive director, and the repurchase plan has basically been completed. We believe that the 2024 refrigerant price increase is expected to help the company reverse fundamentals and enter a new stage of long-term development.
Development trends
The resonance of second-generation and third-generation refrigerants is rising, and a fundamental reversal is imminent. According to data from the Ministry of Ecology and Environment and Baichuan Yingfu, the company's R22/R32/R125/152a/R134a quotas were 5.4/4.7/1.49/0.73/0.69 million tons, respectively. As of March 22, 2024, prices were reported at 2.45/2.8/4.35/1.7/34,000 yuan/ton respectively (up 24.6%/54.3%/42.6%/6.3%/19.3%). According to the Montreal Protocol, developing countries' second-generation refrigerant quotas will be cut by 67.5% in 2025, and the R22 quota in 2025 is about 100,000 tons, or a sharp reduction of 80,000 tons compared to 2024. Looking at the future market, the 2025 quota reduction period is approaching. The R22 price is expected to rise. The R32 downstream air conditioning plant's production schedule exceeds market expectations, the export of air conditioners has entered the preparation period, and air conditioning companies are actively receiving goods. The price of second-generation and third-generation refrigerants is expected to resonate and rise. The company, as a leading refrigerant company, is expected to significantly benefit from the increase in refrigerant prices.
Refined upgrade of fluoropolymers. The company has production capacity of PTFE and PVDF 5.5 and 25,000 tons/year respectively. In recent years, the company's fluoropolymer sector has been continuously refined and upgraded, consolidating profit levels during the downward cycle of fluoropolymer prices, and the share of revenue from high-end brands has continued to rise. In 2023, the company added 101 new brand products. Most of the new high-end material products entered the market trial or small-batch supply stage. The company spent about RMB 935 million on R&D in 2023, accounting for 6.45% of revenue. Administrative expenses decreased by 34.86% year on year, and financing costs decreased by 89.16% year on year. Continued investment in R&D and cost reduction and efficiency are expected to create long-term competitiveness for the company.
Profit forecasting and valuation
Considering that the shares of some of the company's subsidiaries may be reduced, we reduced the comprehensive profit attributable to listed companies by 12% in 2024 to 1.57 billion yuan, and introduced a new net profit of 1.82 billion yuan in 2025. The current price-earnings ratios for 2024/2025 are 9.2x and 7.6x, respectively. Considering the increase in EPS after the cancellation of the repurchase of shares, we raised the company's target price by 25% to HK$10 per share, corresponding to price-earnings ratios of 14.3x and 12.3x in 2024/2025, respectively, with 39.1% upside compared to the current stock price.
risks
The recovery in downstream demand fell short of expectations, competition intensified, and the project was not successfully put into operation.