Incident: On April 17, 2024, the company released its 2023 annual report. It achieved annual revenue of 1,894 million yuan (-13.21%), net profit to mother of 325 million yuan (-31.94%), and net profit of 295 million yuan (-7.90%) after deducting non-return to mother net profit of 295 million yuan (-7.90%).

During the reporting period, the company continued to optimize its product structure, making every effort to further cultivate the field of small varieties, and the overall business situation improved during the quarter. By sector, (1) The large variety sector achieved revenue of 57.6 million yuan during the reporting period, down 82.51% year-on-year from 329 million yuan in 2022. Production and sales volumes were 0.68 million tons (-83.50%) and 0.82 million tons (-79.73%), respectively. The main reason is that the company actively withdrew from the production of water-reducing agent products in the large variety sector in 2023H1. (2) The small variety sector achieved revenue of 1,834 billion yuan in 23 years, a slight decrease of 0.87% year on year, with production and sales volume of 133,300 tons (+8.81%) and 133,000 tons (+10.02%) respectively. Referring to the business data for the first three quarters disclosed by the company, the average sales price of small varieties in Q1-Q3 in 2023 was 13,800 yuan, down 11.70% year on year from 15.6 million yuan in '22. On the basis of the year-on-year increase in production and sales, the small variety sector saw a slight decline in revenue due to factors such as changes in product structure. On a quarterly basis, Q1-Q4 achieved revenue of 4.32/4.65/5.09/488 million yuan respectively, achieving net profit of 0.79/0.71/0.85/90 million yuan, showing an overall growth trend, and Q4 revenue declined slightly by 4.13% month-on-month, while net profit Q4 still increased 5.88% month-on-month, indicating that the increase in the proportion of small products after discontinuation of production led to a further increase in the company's profitability. As a leader in specialty surfactants, the company has always adhered to the business strategy of “restructuring large varieties and creating profits with small functional varieties”. During the reporting period, as external supply and demand changes and internal supply chain stability, the company adjusted its business strategy in due course and stopped production of large products in the water reducing agent sector. Although the performance in 2023 was under pressure due to a brief shutdown of large varieties, the company fully focused on high-profit small-variety products, and the performance is expected to reach a new level.

Gross margin is rising steadily, and product structure optimization is expected to drive a gradual increase in profitability. The company's gross margin in 2023 was 24.62%, up 1.20pct year-on-year, mainly due to the discontinuation of production of large types of water reducing agents, and the share of revenue for small-variety products with higher gross margins increased to 96.85% from 84.80% in '22. The company's net interest rate during the reporting period was 17.14%, down 4.72 pcts year on year. This is related to the 0.32 pct to 7.25% year on year increase in the fee rate for the period. Among them, the financial rate increased by 0.95 pct year on year, mainly due to increased interest expenses and a decrease in exchange profit and loss during the reporting period. In addition, during the reporting period, the company's other earnings fell 76% year on year to 40 million yuan, mainly due to the reduction in government subsidies included in the current period, which also had a certain impact on the company's net interest rate. The company actively develops growth products represented by surfactants for wet electronic chemicals, new energy glue resins, and UV light-curing new material resins, etc., and continues to cultivate the small-variety field. It is expected that with the continuous optimization of the product structure, the company's profitability is expected to gradually grow.

The forward-looking balance sheet indicators are good, and cash flow from operating activities is expected to improve. During the reporting period, the company's accounts receivable increased by 13.43% compared to the beginning of the period, mainly due to an increase in accounts receivable. It is expected that the company's cash flow situation will continue to improve after recovery. The number of projects under construction decreased by 18.48% compared to the beginning of the period. The main ones are the new high-end surface functional material project with an annual output of 30,000 tons and the technical improvement project with an annual output of 60,000 tons of polyether amine during the reporting period. The additional production capacity is expected to lay a solid foundation for the company's performance growth. In addition, the company's net cash flow from operating activities in 2023 was 321 million yuan, a year-on-year decrease of 33.32%, mainly due to a decrease in sales in the current period or due to the discontinuation of production of large products in the water reducing agent sector. With the implementation of the company's technical improvement projects and making every effort to cultivate small-variety products, the company's operating cash flow is expected to improve.

The three factory areas have an orderly production capacity layout, laying a solid foundation for the company's medium- to long-term development. The company currently has three major factory areas: Lukean, Real Madrid Shangyi, and Real Madrid Kaimeike. Among them, after withdrawing from the production of the large variety of water reducing agents, Lukean carried out technical modifications to the original large variety workshop and transferred to other main product lines. The technical improvement project with an annual output of 90,000 tons of polyether amine is expected to be completed in the first half of '24; Real Madrid Shangyi achieved part of the production capacity of 30,000 tons during the reporting period. The current design capacity is 130,000 tons/year; construction ended successfully during the reporting period. December 31, 2023, Project (administrative district, public area) The main building has been topped up, and façade decoration works are underway. The company actively promotes production capacity construction and continues to expand its product matrix. As growth products are gradually put into production, it is expected to continue to drive the company's performance growth and lay the foundation for medium- to long-term sustainable development.

Investment advice: We expect the company to achieve operating income of 25.24/29.35/3.355 billion yuan in 2024/2025/2026, with a year-on-year increase of 33.23%/16.31%/14.31%, and net profit to mother of 4.19/5.40/636 billion yuan, an increase of 29.01%/28.91%/17.84% year-on-year. The current stock price corresponding to 2024/2025/2026 PE is 13.84/10.74/9.11X, respectively, maintaining the “Highly Recommended” rating.

Risk warning: risk of market competition; risk of fluctuations in raw material prices; risk of production expansion falling short of expectations.