Key points of investment:

The company released its 2023 annual report: During the reporting period, the company achieved revenue of 1500 billion yuan (YoY -17%), net profit of 171 million yuan (YoY -17%), net profit net profit of 161 million yuan (YoY -20%), gross sales margin of 30.59% (YoY+3.71pct), net profit margin 11.47% (YOY+0.01pct), and sales, management and financial expenses ratio of 13.36% (YOY+3.98pct). The company's revenue and profit declined year-on-year in 2023. The main reasons are: 1) the price of rare gas products has returned to normal; 2) downstream inventory removal reduces operating rate; 3) interest charges due to the issuance of convertible bonds, etc. Among them, 23Q4 achieved revenue of 371 million yuan (YoY -7%, QoQ -5%), net profit to mother of 49 million yuan (YoY +145%, QoQ +5%), and net profit of 48 million yuan (YoY +129%, QoQ +8%) in a single quarter, which is in line with expectations.

The company plans to pay a dividend of 0.50 yuan (tax included) per share, not transfer capital reserves to increase share capital, and no bonus shares? Results for the full year of 2023 were under year-on-year pressure, but profit margin optimization gradually paid off, and specialty gas profitability continued to increase. According to the company's annual report, in 2023, the company's specialty gases achieved revenue of 1,023 million yuan (YoY -23%), gross profit margin of 36.21% (YoY+5.32pct); general industrial gases achieved revenue of 227 million yuan (YoY +3%), gross profit margin of 14.04% (YoY+1.62pct); equipment and engineering achieved revenue of 210 million yuan (YoY -14%), gross profit margin of 9.88% (YoY 2.70pct). Among them, the main reasons for the decline in specialty gas revenue are: 1) the price of rare gas raw materials returned to normal, leading to a significant drop in the price of products such as lithography gas; 2) sales fell short of expectations due to a decline in the operating rate of downstream customers (such as germanium supplied to Samsung); 3) individual product sales fell short of expectations due to unstable helium gas sources; however, the company abandoned some low-margin products and raised export prices for some fluorocarbon products (overseas gross margin increased 7.6 pcts year-on-year in 2023) to continuously optimize gross profit margins. Looking at specific products, sales of fluorocarbons, hydrides, and other gas mixtures, nitrogen oxides, and carbon oxides were 1277, 2619, 2961, 3365, and 45515 tons, respectively, with year-on-year changes of -9%, -1%, +14%, +1%, and -2%, respectively, achieving revenue of 2.14, 2.43, 2.53, 1.07, and 0.99 billion yuan, respectively, with year-on-year changes of +10%, +12%, -58%, +4%, and -10%, respectively. The gross margins were 30.21%, 24.17%, and 41.40%, respectively. 34.62%, 55.03%, year-on-year changes -0.74pct, +1.87pct, +12.61pct, +7.36pct, and +1.22pct, respectively. Looking ahead, with the steady increase in the utilization rate of downstream fab customers, the company's new products and production capacity such as germanium, ethysilane, and perfluorobutadiene are added one after another, and the company's performance is expected to improve quarterly.

The high-end application field continues to break through, and the layout of new projects is progressing in an orderly manner, and I am optimistic about the company's continued growth. The company adheres to a variety of specialty gas development strategies, with high-end products as the main focus. Currently, the downstream has basically covered domestic 12-inch fabs, and more than 20 products have been supplied to 14nm and 7nm production lines. Some fluorocarbon products and hydrides have entered the 5nm advanced process process and are continuously expanding the coverage. In terms of project construction, the infrastructure for the Jiangxi IPO fundraising project was completed and production capacity was released in an orderly manner; in March 2023, the company completed the issuance of convertible bonds to build a semiconductor material project with an annual output of 1,764 tons in Jiujiang, Jiangxi; in addition, the company had project construction plans in Zigong, Sichuan and Rudong, Jiangsu, and the regional strategic layout was continuously improved.

On October 26, 2023, the company announced that it intends to sign the “Walt Semiconductor Materials R&D Headquarters Project Investment Agreement” with the People's Government of Sanjiao Town, Zhongshan City, Guangdong Province, to invest 800 million yuan to build a semiconductor gas R&D and production center. The implementation of the project will help relieve some of the pressure on production capacity at the Foshan headquarters and lay a solid foundation for the company's future development in Guangdong.

Investment analysis: Maintain the company's 2024 net profit forecast of 233 million yuan, slightly lower the net profit forecast for 2025 to the mother of 305 million yuan (the original value was 324 million yuan), and add the 2026 net profit forecast to 396 million yuan. The current market capitalization corresponds to PE of 23, 18, and 14X, respectively. The company's expansion capacity continues to develop. As downstream demand recovers one after another, the performance is expected to improve quarterly, maintaining the “increase in holdings” rating.

Risk warning: 1) Downstream demand falls short of expectations; 2) Project progress and product introduction fall short of expectations; 3) Prices of raw materials have risen sharply.