Key points of investment
Incident: Tongyizhong released its 2023 annual report. In 2023, the company's revenue was 640 million yuan, up 3.89% year on year; net profit to mother was 154 million yuan, down 10.36% year on year; net profit after deducting non-return to mother was 145 million yuan, down 2.04% year on year; gross profit margin was 38.68%, down 2.98 pct year on year. Looking at Q4 of 2023 alone, we achieved operating income of 122 million yuan, down 23.26% year on year and 5.79% month on month; net profit to mother was 121 million yuan, down 43.13% year on year and 43.05% month on month; net profit after deducting non-return to mother was 0.23 million yuan, down 36.49% year on year and 29.99% month on month.
Driven by market demand and the release of production capacity, UHMWPE fiber production and sales increased dramatically. Among the main products, UHMWPE fiber achieved operating income of 328 million yuan, an increase of 27.57% over the previous year; the gross profit margin was 37.53%, an increase of 0.96pct over the previous year. Composite materials achieved revenue of 283 million yuan, a year-on-year decrease of 17.46%; gross profit margin was 39.98%, a year-on-year decrease of 3.12 pcts. UHMWPE fiber production volume was 5,366.51 tons, up 42.95% year on year; sales volume was 4,040.95 tons, up 42.12% year on year. The production volume of weftless cloth was 1,066.39 tons, up 8.34% year on year; sales volume was 607.00 tons, down -15.49% year on year.
Production capacity continues to expand, and the commissioning of production and operation within 2024 is expected to contribute to future growth. In recent years, the country has formulated a series of policies to support the ultra-high molecular weight polyethylene fiber industry to promote the healthy development of the industry. Continued attention to national security and military investment will also promote the development of the ultra-high molecular weight polyethylene fiber industry. Up to now, the company's UHMWPE fiber design capacity has reached 5320 tons, with a capacity utilization rate of 111.43%; the design capacity of weftless cloth has reached 1,550 tons, with a capacity utilization rate of 78.27%. The production capacity of UHMWPE fiber is 3240 tons, and the production capacity under construction has invested 177 million yuan. Among them, Xintai Branch has a production capacity of 2,240 tons, with an investment of 137 million yuan, which is expected to be completed on June 30, 2024; Yancheng Youhebo has a production capacity of 1,000 tons and an investment of 41 million yuan. It is expected to be completed on March 31, 2024. Weaveless cloth is under construction with a production capacity of 625 tons, and the production capacity under construction has already invested 0.27 million yuan. They all belong to Xintai Branch and are expected to be completed on June 30, 2024.
Investment proposal: Tongyizhong specializes in the production and sale of ultra-high molecular weight polyethylene fibers and their composites. It is expected to benefit from downstream military and civilian application demand, and the company continues to grow due to product structure optimization and scale expansion. The company's revenue for 2024-2026 is estimated to be 853/1117/1349 million yuan respectively, up 33.3%/30.9%/20.7% year on year, and net profit to mother is 192/257/330 million yuan respectively, up 25.1%/33.9%/28.1% year on year, corresponding PE is 13.8x/10.3x/8.0x respectively; first coverage, giving a “buy-B” rating.
Risk warning: Industry competition exceeds expectations; downstream demand falls short of expectations; project construction falls short of expectations.