Event Overview:

In 2023, the company's revenue/net profit attributable to mother, net profit after deduction of non-attributable net profit/operating cash flow were $9.77/1.06/0.82/191 million, up 9.39%/-13.05%/-5.59%/-45.63% year-on-year. The performance was lower than market expectations and lower than the conditions for exercising equity incentives. Our analysis was mainly due to the new materials business falling short of expectations. Non-revenue accounts were mainly government subsidies of $0.27 billion ($40 million in '22); operating cash flow was higher than net profit attributable to mother mainly due to depreciation and increased payables.

24Q1 single quarter revenue/net profit attributable to mother/ net profit deducted from non-mother was $238/0.22/019 million respectively, up 27.69%/76.34%/58.75% year over year. Revenue growth was mainly due to increased delivery of security gloves orders. Performance exceeded market expectations mainly due to lower financial expenses and increased government subsidies due to increased exchange earnings.

In 2023, it is proposed to pay a cash dividend of $2.5 for every 10 shares, with a dividend rate of 34% and a dividend rate of 1.2%.

According to the performance assessment target of the company's 2023 restricted stock incentive plan, revenue for 23-25 was not less than 12.5/13.3/1.79 billion yuan, or net profit after deduction of not less than 122/1.74 billion yuan. We analyzed that the failure to reach the assessment target in 23 was mainly due to new material capacity R&D and production progress falling short of expectations. As high-strength wire progresses this year, 24-25 is still expected to reach the target.

Analytical judgment:

The growth in the gloves business was mainly driven by domestic sales. Revenue from functional safety gloves, ordinary safety gloves, and other protective equipment was 939/01 million yuan, up 6.38%/-7.04% year on year; (1) Looking at the split price, glove production capacity/sales volume/unit price were 1465.22/155.355 million do/60.49 yuan, respectively, up 5.0%/1.3% year on year; capacity utilization rate was 94.28%, down 7.2 PCT year on year. (2) By region, domestic (excluding new materials business) /overseas revenue in '23 was 0.94/854 million yuan respectively, up 24%/4.5% year-on-year. (3) The gross margin of functional security gloves was 25.60%, an increase of 1.14 PCT over the previous year; we estimate that the main profit of the gloves business was 94 million yuan, down 12% year on year, corresponding to a net interest rate of 10%, down 2PCT year on year. The decline in revenue was mainly due to the impact of overseas downstream inventory removal, and the decline in net interest rate was mainly due to capacity utilization and exchange effects.

New materials lost money in 23 years, and we expect a breakthrough in high-strength wire in 24. The revenue of ultra-high molecular weight polyethylene fiber and its composites in 23 years was 29 million yuan. (1) Looking at the split price, the production capacity/sales/unit price was 2,400/343.89 tons/85,200 yuan/ton, respectively. The capacity utilization rate was 48%, and the production capacity utilization rate was 48%, and it is still mainly for personal use. (2) The gross margin of ultra-high molecular weight polyethylene was 1.73%, with a loss of 0.8 billion yuan and a loss reduction of 12 million yuan.

The decline in net interest to mother in '23 was mainly due to an increase in sales and financial expense ratios and a reduction in government subsidies. (1) The company's gross margin in '23 was 25.13%, up 0.08PCT year-on-year. Net profit margin was 10.83%, down 2.8 PCT year over year. In terms of costs, the 23-year sales/management/R&D/finance expense ratios are

3.16%/4.66%/5.10%/0.09%, up 1.04/-0.73/-0.21/1.43PCT; the increase in the sales expense ratio was mainly due to the increase in marketing team remuneration and expenses related to participating in domestic and foreign exhibitions; the increase in the financial expense ratio was mainly due to the decrease in exchange earnings due to fluctuations in the US dollar exchange rate. The share of net income from other income and investment decreased by 1.9 PCT, mainly due to a 47% year-on-year decrease in government subsidies to $27 million; the share of credit impairment losses increased by 0.5 PCT; and the share of income tax decreased by 0.7 PCT. (2) 23Q4 gross margin/net profit margin was 21.08%/4.45%, down 13.4/5.3PCT from year on year. Our analysis showed that sales/management/R&D/finance expenses increased 0.61/-1.76/-2.13/ -5.73 PCT year on year in 23Q4, respectively; tax and additional share decreased by 0.7 PCT; the share of impairment losses increased by 1 PCT; the share of income tax increased by 0.5 PCT; (3) 24Q1 gross margin/return ratio increased by 0.5 PCT; (3) 24Q1 gross margin/due to increased depreciation Net interest rate was 22.44%/9.4%, up 0.16/2.6 PCT year on year. Sales/management/R&D/finance expenses increased 0.59/0.4/-0.23/ -2.97PCT year on year in 24Q1, respectively. The decline in financial expenses was mainly due to RMB appreciation in the same period last year; the share of other income increased by 0.97 PCT; and the share of income tax increased by 0.54 PCT.

Increased inventory. At the end of 23, the company's inventory was 304 million yuan, up 90 million yuan year on year, up 41.9% year on year. The number of inventory turnover days was 144 days, up 31 days year on year, mainly due to the increase in orders. In terms of structure, raw materials/finished products/in-process products were 1.49/1.05 billion yuan respectively, an increase of 102%/-5%/67% over the previous year. The company's accounts receivable were 225 million yuan, up 31% year on year, and the number of accounts receivable turnover days was 73 days, up 6 days year on year. The company's accounts payable was 304 million yuan, up 39% year on year, and the number of accounts payable turnover days was 129 days, up 32 days year on year. 24Q1 inventory was 332 million yuan, up 83 million yuan year on year, up 33% year on year. The number of inventory turnover days was 155 days, up 11 days year on year. The company's accounts receivable were 189 million yuan, up 56% year on year, and the number of accounts receivable turnover days was 78 days, up 7 days year on year. The company's accounts payable was 239 million yuan, up 21% year on year, and the number of accounts payable turnover days was 133 days, up 3 days year on year.

Investment advice

We analyzed, 1) The company's main glove business is expanding at an accelerated pace. The first phase of the “72 million functional safety gloves project” production line in the industrial park is expected to gradually be put into operation in the next 3 years, corresponding to a 3-fold increase in production capacity in the next 3 years. Our analysis mainly benefits from the company's ability to reduce costs through intelligence and has the ability to compete with domestic competitors, thereby opening up the domestic sales market; 2) boosting the second growth curve of the new materials business. Ultra high molecular polyethylene is expected to advance a breakthrough in high-strength yarn this year and is expected to contribute to profits this year. 3) Actively promote the construction of a biodegradable polyester rubber project with an annual output of 110,000 tons, which is expected to contribute new growth points in the long term. Based on the expansion of production in the company's main business and the commencement of foreign sales of ultra-high molecular polyethylene, the company's revenue for 2024-2026 is estimated to be 1,370/18.28/2,386 billion yuan, and the net profit for 2024-2026 is expected to be 1.96/2.63/320 million yuan; the corresponding EPS is 1.35/1.81/2.20 yuan. The closing price of 20.38 yuan on April 21, 2024 corresponds to a 24-26 PE of 15/11/9X, covered for the first time, giving it a “buy” rating.

Risk warning: risk of exchange rate fluctuations; risk of fluctuations in raw material prices; risk of trade friction; risk of production capacity absorption of fund-raising projects; risk of new material development and customer factory inspection falling short of expectations; systemic risk.