Key points of investment

The annual report & quarterly report results are basically in line with market expectations. The company's revenue for the year 23 was 2,015 billion yuan, up 3.3%; net profit to mother was 237 million yuan, up 5.65%; of these, 23Q4 revenue was 537 million yuan, 7.2%/3.7% year on month, and net profit to mother was 61 million yuan, 5.4%/-1.3% year on month, gross profit margin 22.5%, and -1.6 pct/1.3 pct year on month. 24Q1 revenue of 467 million yuan, up 2.15%, net profit attributable to mother of 78 million yuan, 71% increase, net profit after deducting non-net profit of 0.47 million yuan, same increase of 5%, gross profit margin of 22.6%, increase of 0.9 pct, and profit and loss on disposal of illiquid assets of 0.28 million yuan (mainly net cash received from the transfer of 51% of the shares of the holding subsidiary Yuanhe Chemical). The performance was basically in line with market expectations.

The Q1 shipment of activated carbon exceeded expectations, and the amount of granulated carbon was released quickly. In terms of activated carbon, the company shipped 127,000 tons in 23, an increase of 14%. Of these, we expect to ship 10,000 tons of granulated carbon, double the year-on-year increase. We expect to ship 31-32,000 tons of activated carbon in Q1, with sales exceeding market expectations. The company further increases its market share with cost advantages. We expect to ship more than 140,000 tons in 24, an increase of 15%; in terms of silicon materials, the company shipped 344,000 tons of sodium silicate in '23, an increase of 20% over the same period; in Q1, we are expected to contribute 111-120 million in revenue. Furthermore, the company is expanding white carbon black products downward and is expected to start contributing revenue in '25. The company shipped 25,000 tons of silicone in '23, a decrease of 6%. We expect to contribute 40 million dollars in revenue in Q1, and are expected to remain stable in the future.

The decline in activated carbon Q4 gross margin was due to the expansion of the low-end market. In terms of activated carbon, the gross profit margin of the company's products was 27.5% in 23, down 2 pct, mainly due to the expansion of the low-end market. With high gross margin granular carbon emissions, we expect the gross margin to remain basically stable in 24; in terms of silicon materials, the company's gross profit margin of sodium silicate was 10.4% in 23, an increase of 0.9 pct. We expect to remain stable in Q1 24, and the gross margin is expected to exceed 30%. The company's gross profit margin for silicone was 23.7% in '23, down 7pct. Mainly due to increased competition, we expect a slight loss in Q1 '24. Furthermore, with the launch of silicon-carbon products in 25 years, the barriers are even higher, and we expect the profit level to be superior to the main business.

The cost rate gradually declined during this period, and the scale of the projects under construction increased. The cost for the 23-year period was 202 million yuan, the cost rate was 10.01%, and the same increase was -1.23 pct; of these, the cost for the 23Q4 period was 55 million yuan, the cost rate was 10.19%, -2.7/1.09 pct, and the 24Q1 period cost was 56 million yuan, up 6.05% year on year, the cost ratio was 12.02%, and the year-on-year increase was 0.44pct. The company's net operating cash flow in '23 was 271 million yuan, up 6% from the same period, and 24Q1 net operating cash flow was 90 million yuan, an increase of 82.3%. Inventory at the end of 24Q1 was 271 million yuan, which continued to decline from -13.03% at the end of '23. At the end of Q1, the company was constructing 197 million yuan, an increase of 10% over the end of '23.

Profit forecast and investment rating: Considering the intensification of market competition, we revised the company's net profit from 24-26 to RMB 2.6/2.9/4.7 billion (previously forecasted net profit of RMB 28/350 million yuan for 24-25 years), +10%/+13%/+61% year-on-year, corresponding PE to 22/20/12x, maintaining a “buy” rating.

Risk warning: Industry competition intensifies, new technology release falls short of expectations, downstream demand falls short of expectations.