Lianhong Xinke released its 2023 annual report. In 2023, the company achieved operating income of 6.778 billion yuan, a year-on-year decrease of 16.91%; realized net profit to mother of 446 million yuan, a year-on-year decrease of 48.50%.

Key points of investment

EVA prices are under pressure in 2023, and profit in 2024 is expected to recover in 2023. The company achieved operating income of 6.778 billion yuan, a year-on-year decrease of 16.91%, of which EVA sales revenue fell 28.62% year-on-year; realized net profit of 446 million yuan, a year-on-year decrease of 48.50%. Judging from production and sales data, the company's annual EVA output was 160,500 tons, with sales volume of 160,200 tons, and sales volume increased 13% year on year. The main reason for the year-on-year decline in the company's revenue and profit was the price of EVA, the main reason for the year-on-year decline in the company's revenue and profit. The EVA gross margin fell 10.1 pct to 40.95% year on year.

As EVA market demand grew less than expected in 2023 (Q2 to Q3, overseas orders for traditional key downstream foam footwear materials shrank; Q4 PV module price war was intense, industrial chain prices fell, and mainly digested inventory components), combined with new production capacity put into operation and raw material side support weakened, EVA prices were sluggish, and the company's profitability was under pressure.

Since the beginning of the year, the increase in photovoltaic module production schedules has led to an increase in demand for adhesive film and EVA, and demand in other fields such as superimposed EVA foam has been restored. The price of EVA has risen by about 20% compared to the beginning of the year. Looking ahead, Q2 will focus on starting PV bidding, and the price is expected to rise as demand for EVA procurement increases; looking at the whole year, PV installation support+EVA production capacity growth rate will gradually decline in 2024 (250,000 tons of Baofeng Energy and 200,000 tons of Jiangsu Hongjing put into operation), and the company's EVA revenue and profit are expected to recover compared to 2023.

In addition, this year, the company will successively put into production a number of new devices, leading to EVA cost reduction and an increase in the category of high-margin products, and the company's profitability is expected to increase.

New devices have been delivered/put into production one after another, bringing EVA cost reduction+new product release, and the commissioning of VA devices to help reduce EVA costs. The company's current EVA production capacity exceeds 150,000 tons/year, and the production capacity under construction is scheduled to be put into operation in 2025. Both sets of plants mainly produce photovoltaic film products with high added value. The company's 90,000 tons/year VA unit was successfully operated once in January. Currently, it has continuously operated at full load, achieving complete self-supply of raw materials for existing EVA devices, and will guarantee a stable supply of VA raw materials for 200,000 tons/year EVA devices under construction, which is expected to further reduce production costs.

The POE layout enhances the competitiveness of photovoltaics. The company plans to build a 300,000 tons/year POE project to produce a series of high-end olefin material products such as POE photovoltaic film materials and toughening materials. The first phase is expected to be completed and put into operation in 2025. After the project is put into operation, the company will also have two mainstream photovoltaic film products, EVA and POE, which is conducive to further enriching the layout of the photovoltaic materials field and enhancing its core competitive advantage.

Projects under construction have been handled/put into operation one after another to build a new material platform enterprise. Recently, the company's 90,000 tons/year VA plant was put into operation in January; the 20,000 tons/year UHMWPE plant was handed over in January. Currently, the company's projects under construction include 200,000 tons/year EVA, 300,000 tons/year POE, 130,000 tons/year PLA, 300,000 tons/year PO, 50,000 tons/year PPC, 10,000 tons/year high-purity electronic special gas, etc., which are scheduled to be put into operation from 2024 to 2025. After completion, the company is expected to form a comprehensive layout of photovoltaic materials+lithium battery materials+biodegradable materials+special fine materials (electronic special gas, etc.) +upstream raw materials, which will increase long-term performance.

Profit forecasting

According to our observation and judgment on the prices of the company's main products, it is predicted that the company's revenue for 2024-2026 will be 93.26, 119.66 billion yuan, and 14.245 billion yuan, respectively, EPS 0.57, 0.96, and 1.36 yuan, respectively. The current stock price corresponds to PE of 28.8, 17.1, and 12.1 times, respectively. Considering the high growth brought about by the company's new materials platform, we give a “buy” investment rating.

Risk warning

Downstream demand falls short of expectations, risk of product price fluctuations, risk of new devices falling short of expectations, risk of raw material price fluctuations, and increased competition risk.