Description of the event

In 2023, the company achieved revenue of 2,812 billion yuan, a year-on-year decrease of 35.3%; net profit to mother was 79 million yuan, a year-on-year decrease of 82.6%; net profit after deducting non-return to mother was 108 million yuan, a year-on-year decrease of 77.5%. Among them, 2023Q4 achieved revenue of 274 million yuan, a year-on-year decrease of 62.0%; net profit to mother - 74.44 million yuan, a year-on-year decrease of 445.4%; net profit not attributable to mother - 65.54 million yuan, a year-on-year decrease of 196.8%.

2024Q1 achieved revenue of 868 million yuan, a year-on-year decrease of 3.09% and a month-on-month increase of 217.24%; net profit to mother of 0.29 million yuan, a year-on-year decrease of 59.23%, reversing losses month-on-month; net profit excluding net profit of 0.24 million yuan, a year-on-year decrease of 64.6%, reversing losses month-on-month.

Incident comments

In 2023, the EU launched a number of trade friction investigations, causing the company's biodiesel volume, price, and profitability to plummet.

Business side: 1) Production and sales volume: In 2023, the company's biodiesel production and sales volume was 43.0 and 352,000 tons, respectively, +5.57% and -13.1%; capacity utilization rate was 86.0%, down 9.85 pcts year on year; production and sales rate was 81.8%, down 17.5 pcts year on year. 2) Price:

The average price of biodiesel in 2023 was 7,397 yuan/ton, -26.0% year-on-year. 3) Profitability: The average gross profit was 482 yuan/ton, or -54.0%; excluding the bio-based materials sector's net profit (total 18.08 million yuan), the biodiesel sector's net profit to mother was 60.53 million yuan, and the corresponding profit per ton of biodiesel was 172 yuan/ton, which is a historical low.

Reasons for the sharp decline in profitability: 1) Volume and price: In 2023, various EU agencies carried out reviews of biodiesel exports from China, causing European customers to worry about the retroactive adjustment of tariffs. Their intention to purchase declined, and the volume and price of biodiesel fell sharply. 2) Profitability: The drop to freezing point was also due to the fact that gutter oil prices remained relatively rigid (because the restaurant industry's recovery fell short of expectations). 3) Impact of sales model adjustments:

The 2023Q4 loss was due to the company's independent sales business in Europe starting in the fourth quarter, and the sales cycle was lengthened. Depreciation and amortization were rigid costs, and Q4 saved employee bonus expenses.

Other income and exchange gains and losses also dragged down the company's net profit to mother. Other income also decreased by $107 million due to a decrease in sales revenue; the company's net investment income in 2023 was -44 million yuan, which is estimated to be mainly a loss in forward foreign exchange transactions.

2024Q1's revenue and net profit to mother improved month-on-month, and the volume and price of the industry may be bottoming out. In 11/12/2023 and 1/2/2024, Fujian's biodiesel export volume was 3.4, 3.6, 3.3, and 34,000 tons; the average export price was 7524, 7366, 7722, and 7,495 yuan/ton; industry volume prices stopped falling, or bottomed out. The gross margin of 2024Q1 sales was 6.51%, up 4.34pct from month to month. It is estimated that due to a downward trend in gutter oil prices and increased sales volume, dilution depreciation and amortization costs.

In the face of EU scrutiny, domestic biodiesel policies are being actively promoted, and domestic demand is expected to increase. 1) EU anti-dumping investigation progress: According to the European Commission's disclosure, this review was filed on 2023/12/20, and a preliminary ruling is expected to be made around July this year. At that time, the EU demand trend will become more clear. 2) The National Energy Administration held a biodiesel promotion and application pilot work site meeting in September 2023, and issued the “Notice on Organizing and Carrying Out Pilot Demonstrations for the Promotion and Application of Biodiesel” in November 2023. The pilot will be launched in April 2024, and domestic demand is expected to increase.

The company actively responds to various investigations and carries out biodiesel sales business through overseas subsidiaries to ensure the sustainability of production; it has signed a strategic cooperation framework agreement with Sinopec CNOOC Fuel Supply to strengthen biodiesel cooperation in marine fuel oil and other fields. It is expected that the commissioning of the hydrocarbon-based biodiesel project (200,000 tons) and the launch of biological ships will bring about flexible performance. The company's net profit due to mother in 2024-2026 is expected to be 139/1.98/272 million yuan, PE is valued at 22.9x/16.0x/11.6x, maintaining an “incremental” rating.

Risk warning

1. The market pattern of the upstream raw materials industry has undergone major changes, and the difficulty of purchasing raw materials has increased; 2. EU market demand falls short of expectations.