Event: On April 18, 2024, Real Madrid Technology released its 2023 annual report. The company's revenue in 2023 was 1,894 million yuan, down 13.21% year on year; net profit to mother was 325 million yuan, down 31.94% year on year; net profit after deducting non-net profit was 295 million yuan, down 7.90% year on year. The corresponding company's 4Q23 revenue was 488 million yuan, down 4.05% from the previous month; net profit to mother was 90 million yuan, up 6.54% from the previous month.

Comment: The decline in product prices led to a decline in gross margin, putting pressure on the company's performance in the short term. According to the company's 2023 annual report, the company's revenue in the big variety sector/small variety sector in 2023 was 0.58 billion yuan, and YoY was -82.51/ -0.87% respectively; gross margin was 4.61%/25.18%, respectively, a year-on-year change of -4.53/-0.78 pcts. The year-on-year decline in the company's revenue is mainly related to 1H23's active withdrawal from the production of water-reducing agent products in the large variety sector. In 2023, the company's sales volume in the large variety sector was 0.82 million tons, down 79.73% year on year; sales volume in the small variety sector was 133,300 tons, up 10.02% year on year. The decline in the company's gross margin is mainly related to the decline in the prices of major products. In 2023, the average sales price of the company's “large variety” sector was 6,999.61 yuan/ton, down 13.70% year on year; the average sales price for the “small variety” sector was 13,777.42 yuan/ton, down 9.90% year on year. The company's sales expenses decreased 2.75% year on year, sales expenses rate was 0.46%, up 0.05 pcts year on year; financial expenses increased 97.5% year on year, financial expenses rate was -0.03%, up 0.94 pcts year on year; management expenses decreased 11.52% year on year, management expenses rate was 2.94% year on year, up 0.06 pcts year on year; R&D expenses decreased 26.94% year on year, and R&D expenses rate was 3.88% year on year, down 0.72 pcts year on year.

There was some fluctuation in the cash flow from the company's various activities in 2023. Net cash flow from operating activities was $321 million, down 33.32% year on year; net cash flow from investment activities was -113 million yuan, down 20.83% year on year; net cash flow from financing activities was -159 million yuan, up 45.04% year on year; and the balance of cash and equivalent at the end of the period was 682 million yuan, up 7.77% year on year. Accounts receivable increased 13.43% year over year, and the accounts receivable turnover decreased from 9.73 times to 8.06 times; inventory fell 14.17% year over year, and inventory turnover decreased, from 6.79 times to 6.29 times.

The concentration of the surfactant industry is increasing, and the company focuses on small-variety product management. According to data from Zhuochuang News, the top ten domestic surfactant manufacturers accounted for about 58% of production capacity in 2022, an increase of 16 pcts over 2018. The market in the industry tends to concentrate on large-scale and high-output enterprises, and backward production capacity with poor R&D capabilities and a single product structure is gradually declining. According to the company's 2023 annual report, the company is a leading domestic specialty surfactant enterprise with a large production scale, complete variety and high technological content. The main product, nonionic surfactants, is currently the largest surfactant variety in China. The company's production capacity is nearly 300,000 tons/year, and the scale advantage is obvious. The company actively adjusted its product structure, actively withdrew from production of large products with low gross margins such as water reducing agents in 2023, focusing on high-profit small-variety products, accelerating the cultivation of new application sectors such as high-end electronic chemicals and new functional materials and resins, and creating new profit growth points. We are optimistic about the company's production capacity advantages and product structure upgrades, and it is expected that the company's profit level will gradually increase.

The company actively promoted the construction of the project, and construction of the Real Madrid Kaimeike factory started successfully. According to the company's 2023 annual report, Real Madrid Shangyi Phase II will partially be put into operation with a production capacity of 30,000 tons/year in the second half of 2023. The polyether amine technical improvement project with an annual output of 90,000 tons and a polyimide technical improvement project with an annual output of 200 tons is still under construction. Real Madrid Kaimeike successfully started construction of the 330,000 tons of high-end functional new materials project (phase 1). According to the EIA approval documents, the project includes an annual output of 168,500 tons of high-end functional new materials (including 60,000 tons of high-end epoxy resin curing agent-polyether amine series products, 50,000 tons of silicone polyether new material resin products, 50,000 tons of ethylene glycol and related products, 15,000 tons of bio-based high-end surfactant products, 0.85 thousand tons of new aerospace resin products, 30,000 tons of new specialty polymer polyether material products) and by-products 1.5 10,000 tons of ammonia production capacity. We are optimistic about the implementation and completion of the project, which is expected to increase the company's performance.

Investment advice: We expect Real Madrid Technology's revenue for 2024-2026 to be 22.44/27.62/3.126 billion yuan, respectively, up 18.46%/23.11%/13.16% year on year, net profit to mother of 3.97/4.84/542 million yuan, up 22.24%/21.86%/12.10% year on year, corresponding EPS of 0.67/0.82/0.92 yuan respectively. Combined with the company's closing price on April 24, the corresponding PE was 15/12/11 times, respectively. We are based on the following two aspects: 1) We are optimistic about the company's production capacity advantages and product structure upgrades, and it is expected that the company's profit level will gradually increase. 2) We are optimistic about the implementation and completion of the project. We expect it to contribute to the company's performance and maintain a “buy” rating.

Risk warning: risk of project progress falling short of expectations, risk of increased industry competition, risk of fluctuating upstream raw material prices, risk of downstream demand falling short of expectations