Key points of investment:
Company announcement: The company released its 2023 annual report. During the reporting period, it achieved operating income of 2,816 billion yuan (YoY -7.57%), net profit of 606 million yuan (YoY +3.12%), net profit of 569 million yuan (YoY +3.30%); of these, 23Q4 achieved operating income of 663 million yuan (YoY -33.97%, QoQ -18.55%) and net profit of 156 million yuan (YoY -30.71%, QoQ -22.39%), net non-return to mother Profit of 143 million yuan (YoY -37.23%, QoQ -26.67%), and the results were in line with expectations. The company plans to distribute cash dividends of 13 yuan (tax included) to all shareholders for every 10 shares. The total cash dividend is expected to be no more than 375 million yuan, accounting for about 61.78% of net profit due to mother in 2023. The current dividend rate is about 3.57%.
Demand in 2023 was disrupted by inventory factors, but cost pressure eased significantly, and the company's profitability improved significantly. As downstream lubricant customers increased procurement volume in '22 based on supply chain safety and stable supply risks, and higher inventories suppressed terminal demand to a certain extent, the company achieved lubricant additive production and sales volume of 13.35 and 136,400 tons in 2023, down 11.58% and 4.65% year on year, respectively, dragging down the company's annual revenue by 7.57% year on year. However, the overall cost of most raw materials was on a high downward trend in 2023. At the same time, energy costs fell significantly year on year, and the pressure on the cost side was clearly relieved, supporting the company's gross sales margin to increase 4.87 pct to 35% year on year, and net interest rate increased by 2.33 pct to 21.63% year on year, and higher bargaining power boosted the company's profits. Looking at the fourth quarter of '23, the off-season terminal travel combined inventory behavior decreased, and the company's shipments were under pressure, which dragged down the company's performance from month to month. However, the company's profitability continued. The gross profit margin for the 23Q4 single quarter was 36.76%, up 2.45 pct year on year, down 0.71 pct month on month, achieving a net profit margin of 23.62%, up 1.27 pct year on year, and down 1.13% month on month.
Production capacity under construction is being accelerated, high-end products continue to be certified, and core customer access continues to break through. As of the 2023 annual report, the company's projects under construction reached 216 million yuan, an increase of 03 billion yuan over the previous month, fixed assets of 476 million yuan, an increase of 92 million yuan over the previous month, and the planned production capacity was consolidated and released as scheduled. The company currently has a single-dose production capacity of 200,000 tons, a production capacity of 550,000 tons under construction, accounting for 66.52% of compound agent revenue in '23, and the scale has increased rapidly. In terms of product certification, the company's CI-4, CK-4, SN, and SP grade compounds have passed the bench tests of authoritative foreign parties, and have made continuous breakthroughs in core customer entry.
The company seized the supply chain restructuring opportunity of large oil companies, made rapid breakthroughs in overseas markets, and gradually developed into the fifth comprehensive lubricant additive manufacturer in the world other than the “Big Four” companies, with remarkable room for future development.
Profit forecast and valuation: Due to the weakening of overseas supply-side disturbances, the company's product volume will face certain competitive pressure. Therefore, we lowered the company's profit forecast for 2024-2025 and are expected to achieve net profit of 8.17 billion yuan and 1,014 billion yuan (10.18 billion yuan and 1,265 billion yuan before adjustment, respectively), and also added 2026 profit forecasts. It is estimated that net profit to mother will be 1,281 billion yuan, and corresponding PE valuations are 21X, 17X, and 14X, respectively. According to Wind Information, the company's current PB valuation is 3.751. The three-year historical average PB valuation center from April 7, 2021 to the present is at 5.578X. The margin of safety is sufficient, and the “gain” rating is maintained.
Risk warning: Downstream demand falls short of expectations; new projects fall short of expectations; there are new entrants in the industry, and the competitive landscape has deteriorated; the company announced on December 29, 2023 that it has received the “Regulatory Letter on Xinxiang Ruifeng New Materials Co., Ltd., Guo Chunxuan, and Shang Qingchun” from the Shenzhen Stock Exchange, which specifically reminds us to pay attention.