Results for 2023 and 1Q24 fell short of our expectations
The company announced its 2023 results: revenue of 3,582 billion yuan, -3.6% year on year, net profit to mother 160 million yuan, or -44.3% year on year. Among them, 4Q23 revenue was 1.06 billion yuan, +0.6% year on year, and net profit to mother was 18.98 million yuan, -64.0% year over year. The company's 2023 performance fell short of our expectations, mainly due to increased expenses and impairment charges exceeding our expectations.
The company announced 1Q24 results: revenue of 579 million yuan, -13.1% year-on-year, net profit to mother of 21.09 million yuan, or -47.8% year-on-year. The company's 1Q24 performance fell short of our expectations, mainly because the downward pressure on demand exceeded our expectations.
2023:1) Sales declined under pressure throughout the year, and the average price declined overall. In 2023, the company's sales volume of high-performance water reducing agents/high-efficiency water reducing agents/functional materials was 102.2/5.1/269,000 tons, respectively, -8%/+10%/-6% year-on-year; the average price was -4.7%/-4.5%/+10.0%, respectively. 2) There was a slight correction in gross margin. In 2023, the company's comprehensive gross margin was about 34.3%, +0.8ppt year on year, of which functional materials gross margin was +1.29ppt year on year. 3) Overall increase in cost rates. In 2023, the company's sales/management/R&D/finance expenses ratio was 10.5%/8.5%/6.0%/1.4%, respectively, which was basically the same as +0.8ppt /+1.4ppt /+0.5ppt/compared with the same ratio. 4) Depreciation accruals drag down profits. In 2023, the company accrued credit impairment losses of about 67.76 million yuan and calculated asset impairment losses of about 4.88 million yuan, which greatly hampered the results of the year. 5) Cash flow remained strong, and dividend rates declined slightly. The company's net cash flow from operating activities in 2023 was approximately 370 million yuan, +68.8% year-on-year. The dividend rate was about 40.47%, -3.3ppt year over year. 6) The technical service business has maintained steady growth. In 2023, the company's technical service business revenue was +12.2% year-on-year, and gross margin was +1.0ppt year-on-year, maintaining steady growth.
1Q24: The downward pressure on the price of high-performance water reduction doses is still strong. 1Q24's sales volume of high-performance water reducing agents was -15.8% year-on-year, and the average price was -10.4%, and there is still downward pressure; sales of functional materials remained basically flat year over year, with an average price of +13.6% /month-on-month +30.7%, with a significant recovery.
Development trends
The downward pressure on demand will still take time to be relieved, and the risk of impairment is manageable after careful planning. Based on the company's 1Q24 sales performance, we estimate that the downward pressure on downstream demand will take some time to be relieved, and the time for the company's sales to recover year over year may not have arrived. However, we believe that the potential risks have been carefully calculated by the company in 2023, and that about 27.32 million yuan of credit impairment losses were returned in 1Q24, so the company's subsequent risk of impairment is manageable.
Profit forecasting and valuation
As the downward pressure on demand exceeded expectations, we lowered the company's 2024E net profit of 37.7% to 150 million yuan and introduced 2025E net profit of 171 million yuan. The current stock price corresponds to 2024/25E23.4x/20.5x P/E. We maintained our outperforming industry rating and lowered our target price by 32.7% to 10.1 yuan, corresponding to 2024/25E 29.1x/25.6x P/E, implying an upward margin of 24.7%.
risks
Demand recovery fell short of expectations, and depreciation pressure exceeded expectations.