Incident: The company released its 2023 annual report. In 2023, the company achieved revenue of 2,541 billion yuan, an increase of 18.05% over the previous year; net profit to mother was 305 million yuan, an increase of 112% over the previous year.

The integrated civilian explosion business and the potassium perchlorate business led to growth in the company's performance. In '23, the company's revenue was 2,541 billion yuan, up 18.05% year-on-year. Among them, the revenue from civilian explosion integration/new military materials/rail transit automation and information/other businesses was $17.45/1.73/2.43/380 million yuan respectively, +19.71%/-3.99%/-7.30%/+50.56%, respectively. Revenue from other businesses grew rapidly, mainly because the holding subsidiary Yongning Technology achieved annual revenue of 242 million yuan, a year-on-year increase of 100%; total profit of 86.72 million yuan, an increase of nearly 400% over the previous year. In terms of profitability, the company's gross profit margin and net profit margin in '23 were 35.88%/13.84% respectively, up 0.5 pct/5.48 pct year-on-year. The increase in net profit margin was mainly due to asset impairment factors in the same period last year.

The only civilian explosion production group in Jiangxi Province lays out an integrated civilian explosion industrial chain, benefiting from the needs of surrounding infrastructure projects such as the Zhejiang, Jiangxi, Guangdong Canal, etc. In 2023, the company achieved the release of packaged explosives, electronic detonators, and detonators, with a production capacity release rate of 78%. Currently, the company's industrial explosives production capacity is 174,000 tons, and the industrial detonator production capacity is 49.8 million rounds, of which the electronic detonator production capacity is 25.1 million; in addition, the company extended from traditional civilian explosive equipment production to electronic detonator chip module processing, fire equipment, and nail projectile fasteners. The total revenue of related products reached 130 million yuan, and the total profit of related products exceeded 25 million yuan. The company is the only civilian explosion manufacturer in Jiangxi Province. The channel covers Jiangxi Province and eastern Guangdong, and is expected to fully benefit from the implementation of infrastructure projects such as the Ruimei Railway, Changjiang Railway, and the Zhejiang-Jiangxi Guangdong Canal in Jiangxi Province during the “14th Five-Year Plan” period.

Potassium perchlorate business performance has increased, and demand in the fireworks sector has increased. Yongning Technology will expand production capacity according to the situation. The company's potassium perchlorate business revenue and net profit increased dramatically in 2023. The main reason is that the price of potassium perchlorate rose sharply due to the “ban and restriction” trend of fireworks and the strict impact of environmental protection policies; second, new products developed by the company for the military industry and automobile airbags achieved stable mass production, which led to an increase in the company's potassium perchlorate sales volume.

Currently, the national policy is gradually being liberalized in the face of the ban on fireworks and firecrackers, which is expected to drive up demand for potassium perchlorate. The subsidiary Yongning Technology will expand production capacity according to business needs.

The new military materials business is progressing steadily, and the rail transit automation business has recovered significantly. In terms of the new military materials business, the holding subsidiary Aoke New Materials achieved mass production, 1 project completion status review, and 1 project successfully participated in the bidding; the holding subsidiary Tuohong New Materials reached a record high in production and sales, achieving annual operating income of 152 million yuan and total profit of 15.14 million yuan; the wholly-owned subsidiary Mitsuishi Nonferrous entered trial production in 2023; and the wholly-owned subsidiary Xinyu Cathay Pacific has developed and steadily mass-produced 6 types of drone rocket booster products. In terms of rail transit automation and information technology business, the holding subsidiary Taige Era signed a total of 300 million yuan of new orders in 2023. Revenue increased 30% year over year, and total profit doubled year on year.

Profit forecast, valuation and ratings: Cathay Pacific Group is the only civilian explosion manufacturer in Jiangxi. It benefited from the implementation of infrastructure projects in and around the province during the “14th Five-Year Plan” period. At the same time, new military materials benefited from increased downstream demand, while the potassium perchlorate business benefited from the release of high-end products, stricter environmental protection, and “ban restrictions” on fireworks and firecrackers. Maintain the 24-25 net profit forecast of 387 million yuan and 467 million yuan, and add the 26-year net profit forecast of 520 million yuan. The corresponding EPS is 0.62/0.75/0.84 yuan, and the corresponding PE is 19x/16x/14x, maintaining the “buy” rating.

Risk warning: risk of fluctuating raw material prices, risk of market competition, risk of high goodwill balance due to acquisitions.