Incident: Jialian Technology released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 1,721 million yuan, a net profit of -12.90%, and realized net profit of -74.69% year-on-year, net profit after deducting non-return of 0.18 million yuan, -88.49% year-on-year; 4Q23 achieved operating income of 491 million yuan, +24.2% year-on-year, and realized net profit of -18 million yuan, year-on-year. 1Q24 achieved operating income of 500 million yuan, +52.03% year over year, realized net profit of 43 million yuan, +136% year over year, and realized net profit without deduction of 9.86 million yuan, or +8.28% year over year. The company plans to distribute a cash dividend of 2 yuan (tax included) for every 10 shares in 2023.

Comment:

Q1 Revenue increased, export sales improved, domestic sales continued to grow, and global production capacity layout advanced. The company achieved revenue of 1,721 billion yuan in 2023, -12.90% year-on-year, 4Q23 achieved revenue of 491 million yuan, +24.2% year-on-year, and 1Q24 achieved revenue of 500 million yuan, +52.03% year-on-year. By product: In 2023, the company's plastic products (including tableware and plastic household items), biodegradable products, vegetable fiber products, paper products and others achieved revenue of 1,301 million yuan, 262 million yuan, 94 million yuan, and 64 million yuan, respectively, of -21.53%, +87.39%, +4.71%, and -27.64%, respectively. The company vigorously develops businesses in the fields of biodegradable products, plastic household goods, reusable tableware, vegetable fiber products, etc., while adapting to and leading industry changes, while also diversifying business risks. By region: In 2023, the company achieved revenue of 733 million yuan and 988 million yuan respectively, +62.5% and -35.2% compared with the same period last year. Among them, North America, Europe, Oceania, and Asia (excluding China) achieved revenue of 744 million yuan, 154 million yuan, 49 million yuan, and 0.3 billion yuan, respectively, of -37.4%, -37.3%, -15.7%, and +126.79%, respectively. Affected by factors such as the international situation and inflation, demand in overseas markets weakened. At the same time, due to inventory removal through downstream channels, the company's export sales revenue was drastically reduced in 2023, and domestic sales revenue grew rapidly as the market and customer expanded. In terms of production capacity:

Currently, the company's construction projects include an annual output of 100,000 tons of bagasse biodegradable environmentally friendly material products, 120,000 tons of biodegradable materials and household goods, and Thai plastic products. The company continues to accelerate the expansion of production capacity for degradable environmentally friendly products and household daily necessities, and further expand the company's business sector. In 2024, the company plans to establish production bases in East China, South China, North China and Central China. It will form a production network covering the whole country, and gradually complete production line construction at production bases in Thailand, the United States, Ningbo, and Guangxi.

Decreased capacity utilization, sales structure and impairment affect profits. 1) Gross profit margin. The company achieved a gross profit margin of 19.23% in 2023, -3.01 pct year on year, 20.35% gross profit margin in 4Q23, -3.48 pct year on year, 19.33% in 1Q24, and +0.16 pct year on year. By product, the gross margins of plastic products and biodegradable products were 20.01%, 18.27%, -2.69pct and -5.12pct; by region, domestic sales and export gross margins were 14.25% and 22.93%, respectively, -2.32pct and +0.98pct, respectively. The decline in gross margin in 2023 was mainly due to a sharp decrease in export sales revenue, which led to a decline in capacity utilization. In 2023, the capacity utilization rate for plastic products was 61.64%, compared to 83.63% in the same period last year. 2) Period expenses. In 2023, the company's sales, management, R&D, and financial expense ratios were 5.4%, 6.4%, 3.2%, and 0.16%, respectively. The year-on-year changes were +0.4pct, +1.7pct, +0.07pct, and +1.0pct. Among them, the increase in the management fee ratio was mainly due to the increase in the size of the company and the increase in management personnel, while the change in the financial expense ratio was mainly due to an increase in interest expenses and a decrease in exchange income. 3) Net profit. The company achieved net profit of 45 million yuan in 2023, -74.69% year on year, net profit without return to mother of 0.18 million yuan, -88.49% year on year, 4Q23 realized net profit of -0.18 million yuan, -151% year on year, net profit without return to mother -0.2 billion yuan, -183% year on year. 1Q24 achieved net profit of 43 million yuan, +136% year-on-year, and realized net profit without deduction of 9.86 million yuan, or +8.28% year-on-year. In 2023, the company calculated that Zhejiang Home Debao and Sumter Easy Home goodwill asset impairment losses amounted to 43 million yuan, and 1Q24 received 43 million yuan in non-current asset disposal proceeds. 4) Cash flow. The company achieved a cash flow of 150 million yuan from operating activities in 2023, which was mainly due to a decrease in sales inflows due to a decrease in sales; cash flow from investment activities was -800 million yuan, -60% year over year, mainly a decrease in financial management; and cash flow from financing activities was 940 million yuan, +351% year over year, mainly to raise funds for issuing convertible corporate bonds.

Profit forecast and investment rating: The company has leading technical advantages for biodegradable plastic products. Through the acquisition and layout of degradable plant fiber factories, production capacity is accelerated. As the global plastic ban progresses and domestic and foreign customers are rapidly introduced, the biodegradable products business is expected to enter a period of rapid development. The traditional plastic products business continues to be developed by domestic and foreign customers, and is still expected to achieve steady growth.

We expect the company's net profit to be 1.86, 2.15, and 248 million yuan respectively in 2024-2026, with year-on-year increases of 311%, 15.4%, and 15.5%, respectively. The current stock price is 19.55X corresponding to 2024 PE, maintaining an “overweight” rating.

Risk factors: risk of raw material price fluctuations, risk of production capacity release falling short of expectations, industry policy risk.