Key points of investment

Incident: The company released its 2023 annual report. Affected by industry supply and demand, its performance was under pressure in the short term. For the full year of 2023, the company achieved revenue of 14.380 billion yuan, -4.7% year on year; net profit to mother of 1,058 billion yuan, -21.3% year on year; gross profit margin of 14.4%, -1.9 pct year on year; and net profit margin of 7.5%, -1.6 pct year on year. In the 2023Q4 single quarter, the company achieved revenue of 3.224 billion yuan, -12.9% yoy and -8.6% month-on-month; net profit to mother of 189 million yuan, +61.4% yoy and -28.9% month-on-month; gross profit margin 15.2%, +3.9pct yoy, +1.6pct month-on-month; net profit margin 6.1%, +3.2pct yoy and -1.6pct month-on-month.

Vanadium business: The production capacity layout is leading in the country. Together with Dalian Rongke, the non-steel sector is gradually expanding. 1) Production capacity: Domestic production capacity of vanadium products is expanding slowly due to upstream steel demand. By the end of 2023, domestic production capacity of vanadium pentoxide was about 172,900 tons per year, of which the company's production capacity reached 44,200 tons/year, accounting for about 1/4 of domestic production capacity. 2) Resource side: Backed by Pangang Group (with two major mining areas in Panzhihua and Baima), the supply of raw vanadium slag is stable. The agreed purchase price is “Pangang's vanadium extraction cost plus no more than 10% reasonable profit”, and the procurement cost is highly controllable. In addition, the company has also reached cooperation with Han Steel. The latter will provide the company with about 50-130,000 tons of vanadium slag every year, further improving the company's raw material insurance and supply advantages. 3) Non-steel applications: Deeply tied to Dalian Rongke. The company is its priority supplier of vanadium energy storage raw materials. The agreed procurement volume for vanadium products in 2024 will reach 16,000 tons; the two sides have also cooperated to build vanadium electrolyte production capacity. The first stage of 2000 m3/year vanadium electrolyte production capacity has entered the trial production stage.

Titanium business: Steady operation, orderly expansion of chlorinated titanium dioxide production capacity. 1) Market share: The company's titanium dioxide business is operating steadily, the product range is complete, and the market share of output has remained at around 10% for many years. 2) Production capacity: Affected by environmental protection and other related policies, chlorinated titanium dioxide is the main route for the future industry to expand production, and the company actively lays out chlorinated titanium dioxide production capacity. By the end of 2023, the company had built 220,000 tons/year sulfuric acid titanium dioxide production capacity, 15,000 tons/year titanium dioxide production capacity+60,000 tons/year molten salt chloride titanium dioxide production capacity+planned 60,000 tons/year titanium dioxide production capacity from blast furnace slag. 3) Resource side: The “slag to ore” process is combined with the release of new domestic production capacity, and demand for titanium raw materials such as titanium concentrate may increase. The company is the main supplier of titanium raw materials in China, and the titanium slag production capacity is in the first tier of the industry. In terms of titanium concentrate, the company bought out the controlling shareholder titanium concentrate. By the end of 2023, the company's titanium concentrate operating volume had reached 1.76 million tons, ranking among the highest in the country.

Investment advice: The company is a leading domestic vanadium product enterprise and is expected to benefit deeply from Dongfeng's all-vanadium liquid flow battery industrialization. The company's net profit is expected to be 11.13/14.13/1,766 billion yuan respectively in 2024-2026, and EPS 0.12/0.15/0.19, respectively. Based on the closing price on April 1, 2024, the corresponding PE is 25.57x/20.13x/16.11x, respectively. In view of the company's future growth, broad profit margins, and scarcity of strong targets, it was covered for the first time and given a “buy” rating.

Risk warning: Downstream demand in the titanium dioxide industry falls short of the expected risk; the industrialization process of all-vanadium liquid flow batteries falls short of the expected risk.