Incidents:

On April 17, 2024, Real Madrid Technology released its 2023 annual report: achieving operating income of 1,894 million yuan, a year-on-year decrease of 13.2%; realized net profit of 325 million yuan, a year-on-year decrease of 31.9%; realized net profit deducted from non-return to mother of 295 million yuan, a year-on-year decrease of 7.9%; gross sales margin of 24.6%, an increase of 1.2 pcts year-on-year, and a year-on-year decrease of 4.7 pcts; net cash flow from operating activities was 321 million yuan.

In the 2023Q4 quarter, the company achieved operating income of 488 million yuan, +5.8% year over month, and -4.1% month on month; realized net profit of 90 million yuan, -8.6% year on year, +6.5% month on month; net profit after deduction of 88 million yuan; and net cash flow from operating activities of 93 million yuan. Gross sales margin was 26.1%, +3.4 pct year on year, +0.3 pct month on month; net sales margin was 18.4%, down 2.9 pct year on year, up 1.8 pct month on month.

Investment highlights:

The company optimized its product structure in a timely manner, and its profitability increased steadily in 2023. In the first half of 2023, the company voluntarily withdrew from the production of water reducing agent products in a large variety of sectors.

For the full year of 2023, the company achieved operating income of 1,894 million yuan, a year-on-year decrease of 13.2%; realized net profit of 325 million yuan, a year-on-year decrease of 31.9% and a year-on-year decrease of 152 million yuan. In 2023, the company achieved gross profit of 466 million yuan, year-on-year, year-on-year expenses of 137 million yuan, year-on-year -014 million yuan, and other revenue of 40 million yuan, or -126 million yuan year-on-year, mainly due to a decrease in related government subsidies. By sector, the company's large products and small products achieved revenue of 0.58 billion yuan in 2023, with year-on-year changes of -82.51%/-0.87%; gross margins of large products/small products were 4.61%/25.18%, respectively, or -4.53 pct/-0.78 pcts year on year. The company adjusted its business strategy in a timely manner, and made every effort to focus on high-profit small-variety products. The company's consolidated gross profit margin in 2023 was 24.61%, +1.2 pcts year over year. In 2023, the net cash flow from the company's operating activities was 321 million yuan, or -33.32% year-on-year, mainly due to a decrease in sales in 2023. In terms of the period cost ratio, the company's sales/management/R&D/finance expenses in 2023 were 0.46%/6.81%/3.88%/-0.03%, respectively, +0.05/0.06/-0.73/+0.95 pcts.

In 2023, Q4 achieved net profit of 90 million yuan, an increase of 06 billion yuan over the previous month, achieved gross profit of 127 million yuan, a decrease of 0.04 billion yuan, other revenue +0.1 billion yuan, and gross sales margin of 26.1%, +3.4 pct year on year, and +0.3 pct month on month.

Focus fully on high-profit small varieties. With sales of 130,000 tons of small varieties in 2023, China's surfactant industry has a fairly large production scale. The equipment and technology are getting closer to the international level, and the quantity, variety and quality of products have all increased and improved dramatically. As the demand for domestic substitutions is further accelerating, leading domestic companies are ushering in a golden period of surfactant innovation and development. With the development of the world economy and the development of science and technology, surfactants are developing more rapidly, and their application fields will also expand from existing traditional fields to various high-tech industries and strategic emerging fields.

In 2023, the company sold 0.82 million tons of large variety products, -79.73% year on year, 0.70 million yuan/ton, year on year -0.11 million yuan/ton; sales volume of small variety products was 133,000 tons, +10.02% year on year, and unit price of small variety products was 13,800 yuan/ton, -0.15 million yuan/ton year on year.

After taking the initiative to withdraw from the production of a large variety of water-reducing agent products, the company actively developed growth products represented by surfactants for wet electronic chemicals, new energy glue resins, UV light-curing new material resins, etc., and continued to deepen the field of small varieties based on the principle of “small varieties create profit”. It is expected that with the continuous optimization of the company's product structure, the company's profitability is expected to gradually grow.

Factory No. 3 has actively promoted and continued to cultivate specialty surfactants after years of development. The company has now become a leading specialty surfactant enterprise with large production scale, comprehensive variety and high technological content in China. The company currently has two major production bases, Lukean and Real Madrid Shangyi, with an annual production capacity of nearly 300,000 tons of specialty surfactants. In addition, the installation of catalysts and condensation systems for the 90,000-ton polyether amine technical improvement project is still in progress.

The “Third Factory” Real Madrid Kaike project with an annual output of 330,000 tons of high-end functional new materials is also being actively promoted. It is expected to produce 330,000 tons of high-end functional new materials (120,000 tons of high-end epoxy resin curing agent-polyether amine series products, 50,000 tons of silicone polyether new material resin products, 30,000 tons of high-end allyl alcohol and derivatives, 15,000 tons of ethylene glycol and derivatives, 20,000 tons of resin thinner products, 30,000 tons of ethylenediamine products, 10,000 tons of methylepichlorohydrin products, 15,000 tons of bioactive surfactants Pharmaceutical products, 10,000 tons of high-end aerospace New resin material products, 30,000 tons of special polymer polyether new material products). The first phase of the project will produce 168,500 tons of high-end functional new materials per year, and trial production will be achieved by the end of 2025.

The profit forecast and investment rating comprehensively consider the company's product structure, price, and profit situation. We make appropriate adjustments to the company's performance forecast. The company's revenue for 2024-2026 is 23.48, 27.62, and 3.312 billion yuan, respectively, and net profit to mother is 4.02, 4.73, and 571 million yuan, respectively, corresponding to PE 14, 12, and 10 times, respectively. Consider the company's future growth and maintain a “buy” rating.

Risks suggest that the progress of new production capacity construction falls short of expectations, the contribution performance of new production capacity falls short of expectations, fluctuations in raw material prices, changes in environmental protection policies, and a sharp decline in the economy.