Net profit for the year 23 was -22.5%/-24.8%, maintaining the “purchase” rating. Leizhi Group published its annual report for the year 23: achieving revenue/net profit attributable to mother/net profit of 30.6/1.6/120 million yuan in 23 years, -22.5%/-24.8%/-34.4% YoY; of these, 23Q4 was 2.9/-0.1/-0.3 billion yuan, -67.4%/-554.7%/-0.26 billion yuan, -69.6%/-119.8%/-184.1% month-on-month. Considering that the recovery in downstream real estate demand is still slow, we lowered the company's revenue and net profit growth forecasts. We expect EPS to be 0.24/0.28/0.33 yuan for 24-26, respectively (the previous value was 0.46/0.54/-yuan in 24-26).

Comparatively, the company's 24-year Wind unanimously expected an average of 17xPE. Considering the company's continued expansion of production capacity and the high share in some regions, it was given 20xPE in 24, with a target price of 4.85 yuan (previous value of 8.32 yuan), maintaining a “buy” rating.

Revenue from the main business was under pressure in '23, but gross margin continued to improve

In '23, the company's new admixture materials/technical services achieved revenue of 2.24 billion yuan, respectively, or -11.0%/-10.2% year-on-year, mainly due to the relatively weak market demand in the construction industry under the influence of the decline in real estate investment growth. The sales volume of new admixture materials in '23 was 1.35 million tons, -2.2% year-on-year.

The overall gross margin for 23 was 24.8%, +3.3 pct year on year. Among them, the gross margin of new adjuvant materials/technical services was 24.2%/32.6%, +1.8/-0.95pct year on year. The overall gross margin of the main business increased year on year.

23Q4 gross margin was 71.5%, +46.0pct yoy and +52.9pct month-on-month.

The revenue dilution effect in '23 weakened, and the expense ratio increased year on year; the net operating cash flow rate improved by 17.8%, +3.9 pct year on year, with sales/management/R&D/finance expenses ratio of 6.7%/5.0%/5.6%/0.5%, and +1.8/+1.0/+0.9/+0.1 pct year on year. The company's net interest rate/net interest rate after deduction to mother in '23 was 5.2%/4.0%, -0.2/-0.7pct year on year; 23Q4 was -2.9%/-11.5%, -3.1/-10.6pct year on year. At the end of 23, the company's balance ratio/interest-bearing debt ratio was 42.4%/7.2%, which was basically the same as the previous year/+0.4 pct. Net operating cash flow of 440 million yuan in '23 was +4.1% year-on-year, mainly due to an increase in the return of the company's sales cash flow; net operating cash flow in 23Q4 was 100 million yuan. The average cash/cash ratio for the full year of '23 was 106.6%/90.2%, respectively.

The dual engine helped the company develop steadily, and the regional market share gradually increased. The company is supported by comprehensive technical service business and new admixture materials business. According to the company's annual report, the comprehensive technical service business continued to expand the market in 2023, providing testing services for many large-scale engineering projects, while actively deploying various fields such as new energy electronics, medical care and military electronics; the new additive materials business aims to increase market share and expand overseas markets, and the market share of the Yangtze River Delta and Pearl River Delta regions accelerated markedly.

Kezhijie New Materials Group has the highest market share in Fujian, Guizhou, Chongqing, Hainan, Shaanxi and Shanghai. Among them, Fujian and Hainan have all had a market share of over 30%.

Risk warning: Raw material prices have risen more than expected, and cash flow from the admixture business has deteriorated.