Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 1,141 million yuan (yoy -17.75%) and net profit of 167 million yuan (yoy -35.79%). It plans to distribute a cash dividend of 1.3 yuan (tax included) per share to all shareholders, with a dividend rate of 84.1%. In the first quarter of 2024, the company achieved operating income of 302 million yuan (yoy +31.02%) and net profit to mother of 28.2699 million yuan (yoy -49.84%).
Container demand affected overall revenue in 2023, and the wind power paint business maintained rapid growth.
In 2023, the company achieved revenue of 1,141 billion yuan (yoy -17.75%). By business: 1) Container Coatings: In 2023, the container industry experienced an industry low, industry demand declined, the volume and price of the company's products fell sharply, and container paint revenue and gross margin declined sharply, affecting overall revenue performance throughout the year. During the period, container paint achieved revenue of 584 million yuan (yoy -37.87%), accounting for 51.21% of revenue (YoY -16.59pct), container paint sales volume of 35,600 tons (yoy -17.25%), average sales price of 16,400 yuan/ton (yoy -24.92%), and gross margin of 17.04% (YoY -11.87pct). 2) Wind power paint: Due to the rapid increase in the scale of wind power installed throughout the year, the company's wind power paint sales volume and revenue increased, cost reduction, and industry competition intensified, the unit sales price declined, but the decline was lower than the cost decline, and the product still maintained a year-on-year increase in high gross margin. In 2023, the company's wind power paint revenue was 510 million yuan (yoy +46.35%), accounting for 44.73% (year-on-year +15.84pct), wind power paint sales volume was 12,400 tons (yoy +53.91%), the average selling price was 412,000 yuan/ton (yoy -17.26%), and the gross margin was 46.35% (+6.25pct year on year). On a quarterly basis, 2023Q4's revenue increased year-on-year, YOY +51.76%, or mainly due to a recovery in demand in the container industry from 2023Q4, which led to a recovery in sales and revenue growth. However, the recovery in product prices is lagging behind, so the gross margin of Q4 container coating products has not recovered.
Container paint dragged down overall profit performance, and the growth rate of the parent performance declined sharply.
In 2023, due to multiple factors, the company's net profit to mother fell sharply to 167 million yuan (yoy -35.79%) due to the year-on-year decline in the company's revenue, decline in gross margin, and year-on-year increase in impairment charges, and the net sales margin was 14.64% (-4.11 pcts year over year). The company's comprehensive gross margin during the period was 30.33%, -1.4 pcts year on year, mainly due to a sharp decline in the gross margin of the company's container paint business. The gross margins of container paint, wind power paint, and other industrial coatings were 17.04% (-11.87 pct year over year), 46.35% (+6.25 pct year over year), and 20.85% (year-on-year +5.75%), respectively. The company's expense ratio for the period was 13.01% (+0.84pct year on year), of which the sales/management/finance/R&D expense ratios were +1.40pct/+0.41pct/-0.99pct/+0.03pct, respectively. The company's sales expenses increased 17.77% year-on-year during the period, mainly due to the company actively exploring the market and increasing marketing service fees during the period; management expenses decreased by 8.26% year on year, mainly due to a decrease in share payments. In addition, the company's credit impairment losses increased by 30 million yuan year-on-year during the period, which had a certain impact on the decline in net interest rates. The company's net operating cash flow during the period was 41 million yuan (283 million yuan in the same period last year). On the one hand, due to the extensive use of bills for settlement by the company's customers, and on the other hand, due to the decline in container paint revenue, the cash received from selling products and providing services declined.
2024Q1 revenue increased year-on-year, demand for container coatings improved, and future gross margin restoration is worth looking forward to. With 2024Q1, the company achieved revenue of 302 million yuan (yoy +31.02%). The year-on-year increase in revenue growth was mainly due to the continued recovery in demand in the Q1 container industry.
Based on the 2023Q1 business revenue and 2024Q1 business data previously announced, 2024Q1 container paint sales and revenue were +207.46% and 134.96%, respectively, while wind power paint sales volume and revenue were -21.56% and -40.54%, respectively. During the period, the company's gross margin was 20.37% (-16.92pct year on year). We think it may be mainly due to the fact that the gross margin of container paint is still under pressure, while the share of high-margin business contracted. The average selling price of 2024Q1 container paint is YOY -23.58%, or due to falling raw material costs and price recovery lagging behind the recovery in demand. As industry demand continues to improve, the recovery in product prices is expected to be reflected in Q2; the average sales price of wind power paint is YOY -24.19%, or due to a decrease in the purchase price of the main raw materials of the company's products. During the period, the company's expenditure rate for the period was 9.25% (-3.48 pcts year over year), of which the sales/management/finance/R&D expenses ratio was -0.76pct/-1.08pct/-0.60pct/-1.04pct, respectively. Affected by the sharp decline in the company's gross margin, the company's net profit to mother during the period was 28.2699 million yuan, YOY -49.84%.
Top quality container/wind power paint, product+service+new business creates long-term growth, and has an impressive high dividend ratio. The company is a high-quality leader in the high-barrier segment of the industrial coatings industry. It has outstanding product technical advantages, abundant downstream high-quality customer resources, product strength, brand power and coating service capabilities to create industry competitiveness, and its market share in the container and wind power blade coatings field is rapidly increasing. Demand in the container industry is expected to continue to pick up in 2024, and it is expected that price recovery may gradually be reflected, helping improve the company's performance. In addition, as the company's market share in the domestic wind power blade coating field increases, the company is actively expanding its business segment and expanding wind power tower coatings. It is expected that it will quickly achieve market promotion, and at the same time gradually develop overseas markets and create a new growth curve. Using the resource advantages of shipping customers in the container coating sector, the company lays out marine coatings to create a long-term growth support point. In the future, the company's total paint production capacity is expected to increase from 90,000 tons/year to 140,000 tons/year, and the production capacity scale and location advantage will increase simultaneously. The company plans to distribute a cash dividend of 1.3 yuan (tax included) per share to all shareholders in 2023. The total cash dividend will account for 84.09% of the current net profit to mother.
Profit forecast and investment proposal: Considering that the recovery in container paint prices lags behind the recovery in demand and the decline in wind power paint sales prices due to falling raw material prices, we lowered the company's profit forecast. The company's revenue for 2024-2026 is expected to be 1,515 billion yuan, 1,795 million yuan and 2.81 billion yuan, respectively, up 32.86%, 18.43% and 21.54 percent year-on-year respectively, and net profit to mother of 239 million yuan, 304 million yuan and 372 million yuan, respectively. 22.35%, dynamic PE is 16.5x, 13.0x, and 10.6x, respectively. A “buy-A” rating is given, and the target price for 6 months is 44.20 yuan, which corresponds to 20 times PE in 2024.
Risk warning: Downstream demand recovery falls short of expectations; new product promotion falls short of expectations; new business expansion falls short of expectations; market competition intensifies; raw material prices have risen sharply; capacity construction falls short of expectations, etc.