Incidents:
On April 2, 2024, Soft Control Co., Ltd. released its 2023 annual report: achieved operating income of 5.648 billion yuan in 2023, down 1.54% year on year; realized net profit of 333 million yuan, up 64.40% year on year; realized net profit deducted from non-return mother was 263 million yuan, up 72.43% year on year; gross sales margin of 26.00%, up 5.84 pct year on year, net sales margin was 7.00%, up 2.95 pct year on year; net cash flow from operating activities was 231 million yuan, down 39.54% year on year .
In the 2023Q4 quarter, the company achieved operating income of 1,970 million yuan, +14.14% year over month, +59.33% month on month; realized net profit of 124 million yuan, +44.09% year on month, and +7.92% month on month; net cash flow from operating activities was -013 million yuan, down 248 million yuan year on year, down 44 million yuan month on month. Gross sales margin was 26.18%, down 1.03 pct year on year and 3.10 pct month on month. Net sales margin was 6.83%, up 1.02 pct year on year and down 4.27 pct month on month.
Investment highlights:
The rubber machinery industry is steady, moderate and positive. The company's net profit from the mother in 2023 increased year-on-year in 2023, and the rubber machinery industry showed a steady, moderate and positive trend. In 2023, the company achieved operating income of 5.648 billion yuan, a year-on-year decrease of 1.54%; realized net profit to mother of 333 million yuan, an increase of 64.40% over the previous year. In 2023, the company achieved gross profit of 1,468 million yuan, a year-on-year increase of 312 million yuan, with period expenses of 1,039 million yuan, an increase of 172 million yuan; minority shareholders' profit and loss of 0.62 million yuan, an increase of 0.32 million yuan; credit impairment losses of 0.19 million yuan, or -44 million yuan in the same period of the previous year. The company achieved net profit of 395 million yuan in 2023, an increase of 163 million yuan over the previous year. In addition, the company's revenue from January to July 2022 included Atomic Energy Company Shandong Dongfang Hongye New Materials Co., Ltd., which was disposed of at the end of July 2022, so revenue declined slightly in 2023. By sector, in 2023, the company achieved revenue of 40.21/1,587 billion yuan, +23%/9%; achieved gross profit of 11.82/268 million yuan, +17%/146%, respectively; achieved gross profit of 29.42%/16.89%, respectively, and achieved gross profit margin of 29.42%/16.89%, respectively, -1.53 pct/+9.39 pct. At the end of 2023, the company's contract debt was 4.169 billion yuan, +5.67% compared to the end of Q3, laying the foundation for subsequent revenue growth. In 2023, the company's operating activities generated a cash flow of 231 million yuan, or -39.54% year-on-year, mainly due to the large balance of restricted funds at the end of the period, leading to cash outflows from operating activities.
In terms of period expenses, the company's sales/management/ R&D/ finance expenses in 2023 were 2.78%/8.11%/6.35%/1.15%, respectively, +0.38 pct/+1.01 pct/+1.07pct/+0.83pct.
Preparations for falling inventory prices at the end of the period were hampered. The 2023Q4 performance continued its month-on-month growth trend. In 2023Q4, the company achieved net profit of 135 million yuan, a decrease of 2.72 million yuan over the previous month, and achieved gross profit of 516 million yuan, an increase of 154 million yuan over the previous month. Among them, in terms of period expenses, 2023Q4 sales expenses were 59.49 million yuan, an increase of 22.12 million yuan; management expenses were 130 million yuan, an increase of 7.69 million yuan over the previous month; R&D expenses were 109 million yuan, an increase of 6.81 million yuan over the previous month, financial expenses were 30.45 million yuan, an increase of 37.81 million yuan over the previous month, mainly due to the transformation of the subsidiary Yikai New Materials under construction at the end of 2022, and interest expenses ceased to be capitalized. 2023Q4, the company's asset impairment of 100 million yuan, is mainly due to the impact of preparation for inventory price reduction at the end of the period. Inventory price reduction losses and contract performance cost impairment losses amounted to 82 million yuan, accounting for 82% of total asset impairment losses, while 2023Q3 did not accrue asset impairment losses, which led to a significant increase in asset impairment losses in 2023Q4. In addition, preparation for price reduction of raw materials and in-product inventory amounts to a total of 81 million yuan. Inventory products are less accrued. If they are recovered later, it will have a positive impact on the company's net profit returned to mother. The credit impairment loss in Q4 was 24.88 million yuan, a decrease of 7.68 million yuan over the previous month, mainly due to good repayment conditions in the current period and preparation for recovering bad debts.
Tire expansion is driving up demand for equipment. In 2023, the company signed a major breakthrough in domestic and foreign orders, and the net profit of Chinese tire companies returned to their mother showed a clear upward trend in 2022 to 2023. Through an international layout, the trend of Chinese tire companies using cost advantages to rise globally is becoming more and more obvious, and capital expansion is also showing signs of acceleration. The company currently has products such as vulcanizers, molding machines, drums, lining layers, cutting machines, etc., forming a full range of semi-steel/all-steel/off-highway product groups. Software and hardware products can cover intelligent equipment throughout the tire life cycle. In 2023, the company continued to stabilize, with a high completion rate in the domestic market and continuous optimization of the customer structure; overseas market orders reached a record high, cooperation with some high-end customers achieved breakthrough progress, and the international team continued to improve. By the end of 2023, the company's inventory reached 5.673 billion yuan, +21.71% year-on-year, of which inventory of products and products in stock was 5.195 billion yuan, accounting for 92%. By the end of 2023, the company's contractual liabilities were 4.168 billion yuan, +31.97% year-on-year, with a significant increase in business scale.
According to the related transaction forecast announcement issued by Sailun Tire on December 14, 2023, based on the strategic plan and actual situation, Sailun Tire is expected to increase the procurement volume of equipment, molds and liquid gold materials in 2024. In 2024, Sailun Tire plans to purchase equipment, molds, software, spare parts, etc. from Soft Control Co., Ltd. for a total amount of 1,520 billion yuan, with a related transaction volume of 749 million yuan in 2023; a total purchase of synthetic rubber of 1.5 billion yuan, and a related transaction amount of 1.02 billion yuan in 2023.
Equity incentives show confidence. The 2023 dividend payment rate reached 30.38%. On October 14, 2021, the company announced the 2021 restricted stock incentive plan. The total number of restricted shares awarded to the incentive target was 19.6 million shares, and the grant price was 2.55 yuan/share. The assessment target is based on net profit returned to mother in 2020, with net profit growth rates of not less than 30%, 50%, and 80% in 2021-2023. It is expected that 40%, 30%, and 30% bans will be lifted on October 24, 2022, October 23, 2023, and October 22, 2024, respectively.
On August 22, 2022, the company announced the 2022 stock options and restricted stock incentive plan. The number of stock options to be granted under the incentive plan is 23.8800 million shares, the exercise price of the stock options granted under the incentive plan is 6.17 yuan/share, the number of restricted shares to be granted under this incentive plan is 15.92 million shares, and the grant price of restricted shares granted is 3.86 yuan/share. The assessment target is based on net profit returned to mother in 2021, with net profit growth rates of not less than 25%, 75%, and 125% for the period from 2022 to 2024. It is expected that 40%, 30%, and 30% bans will be lifted on August 22, 2024, and August 22, 2025, respectively.
On August 15, 2023, the company announced the 2023 restricted stock incentive plan. The number of restricted shares to be granted under this incentive plan is 37.5 million shares, and the grant price is 4.00 yuan/share. The assessment target is based on net profit due to the mother in 2022, and the net profit growth rate for 2023-2024 is not less than 30% or 60% (the above net profit excludes all values affected by the share expenses of the incentive plan during the validity period). The 50% and 50% bans are expected to be lifted on August 28, 2024 and August 28, 2025, respectively.
In terms of dividends, according to the announcement of the company's 2023 profit distribution plan, based on the company's total share capital of 1,012 million shares on December 31, 2023, it is proposed to distribute a cash dividend of 1.00 yuan (tax included) and 0 bonus shares (tax included) to all shareholders. The total dividend is expected to be 101 million yuan, and the dividend payment rate is 30.38%.
EVEC rubber has low rolling resistance and excellent wear resistance. The gross margin increased significantly in 2023. By the end of 2023, the company's EVEC rubber design capacity was 108,000 tons. Compared with traditional materials, EVEC rubber has the following competitive advantages: the application of this type of product can make tires achieve a balance of rolling resistance, dry and wet grip, and wear resistance. It has a lower rolling resistance coefficient and high wear resistance, and the wear resistance is more than 10% higher than the current customer formula for road tests in the same vehicle and area.
In 2023, the company's new rubber materials achieved revenue of 1,587 billion yuan, +9% year on year; achieved gross profit of 1,319 billion yuan, +146% year over year; achieved gross profit margin of 16.89%, +9.39 pct year on year, the highest level in nearly 10 years.
Profit forecast and investment rating According to industry sentiment, we adjusted the company's profit forecast. We expect the company's net profit to be 5.04, 7.49, and 847 million yuan respectively in 2024/2025/2026, corresponding to PE of 14, 9, and 8 times. Considering the rising popularity of downstream tires, we maintain the “buy” rating.
Risks indicate the risk of falling tire equipment orders; the risk that the company's new production capacity falls short of expectations; the risk of rising raw material prices; environmental protection and production safety risks; competition in the same industry increases the risk.