2023 results fall short of market expectations

The company announced 2023 results: revenue of 2.99 billion yuan, -27% year over year; gross profit of 334 million yuan, gross margin -1.8ppt to 15.2% year on year; net profit to mother of 150 million yuan, -49% year on year; net profit to mother -2.9ppt to 6.8% year on year.

Corresponding to 4Q23: revenue of 356 million yuan, -44%/-41%; gross profit of 70 million yuan, -34%/24%, gross margin +2pp/+5.3ppt to 19.5%; net profit to mother of 80 million yuan, -79%/-83% YoY, net profit margin -3.8pp/ -5.8ppt to 2.3% year over year, lower than market expectations. We believe that the main factors are: 1) falling shipping costs affect the company's single-box profit level; 2) industry demand is under pressure; 3) M&A management The increase has led to an increase in the management cost rate.

Development trends

Demand in the industry has remained under pressure since this year, but thanks to the acquisition of high-quality assets, the company's container volume is expected to maintain year-on-year growth. Affected by weak overseas demand, the export value of organic and inorganic chemicals (in RMB) was -17% year-on-year in 2023 and -19% year-on-year in January-February 2024. The recovery of industry demand is still ongoing. In 2023, the company's total container volume was +35%, with cross-border chemical logistics supply chain services +27%, warehousing +21%, and road transportation +91%, which is better than the industry level. We think the main reason is the company's integration of high-quality resources such as Shangyu Caiyuan New Materials in Shaoxing, Hunan Hongsheng, and Hunan Xinhong (the company added about 170,000 square meters of land for storage in 2023). Looking back, we believe that with the release of production capacity from high-quality acquired assets such as Yongtai Transport and Tianjin, the company's container volume is still expected to maintain a year-on-year growth rate superior to that of the industry in 2024.

Affected by the Red Sea incident, sea freight rates rose in 1Q24, and we believe it is expected to support the improvement of the company's profit level.

In 2023, due to weak supply and demand, shipping costs declined significantly (CCFI -66% year-on-year in 2023 and -47% year-on-year in 4Q23), but due to the Red Sea incident, shipping supply pressure was relieved, so 1Q24 sea freight rates rose (CCFI +19% year-on-year in 1Q24). We believe this may increase the company's 1Q24 single-box profit level. Although the continuation of the Red Sea incident is uncertain, we believe that the 1Q24 profit improvement combined with cost control will hopefully support the company's full-year performance recovery.

Profit forecasting and valuation

Considering that industry demand is still being repaired, we cut 2024 revenue by 30.7% to RMB 2,711 billion, and net profit to mother by 46.9% to RMB 210 million; for the first time, we introduced 2025 revenue of 3.454 billion yuan, and net profit to mother of 271 million yuan. The current stock price corresponds to 13.6 times the 2024 price-earnings ratio and 10.5 times the 2025 price-earnings ratio. Maintaining an outperforming industry rating, the target price was lowered by 35.8% to 33.9 yuan, corresponding to 17.0 times the 2024 price-earnings ratio and 13.1 times the 2025 price-earnings ratio, with 23.5% upside compared to the current stock price.

risks

Shipping costs have dropped sharply, demand for hazardous chemicals continues to weaken, and the company's new project business progress falls short of expectations.