Event: The company released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved revenue of 12.042 billion yuan, a year-on-year decrease of 4.36%; realized net profit of 2,527 billion yuan, a year-on-year decrease of 36.84%; realized net profit deducted from mother of 2,461 billion yuan, a year-on-year decrease of 35.90%; and achieved an overall gross profit margin of 37.43%, down 10.40 Pct from 2022. The 2024Q1 company achieved revenue of 2,328 billion yuan, a year-on-year decrease of 9.38%; realized net profit of 158 million yuan, a year-on-year decrease of 75.64%; realized net profit deducted from mother of 149 million yuan, a year-on-year decrease of 76.25%; and achieved an overall gross profit margin of 18.87%, down 27.16 Pct from 2023Q1.

Incident reviews:

Competition in the diaphragm industry intensified, the company's lithium battery diaphragm profits fell short of expectations, and the share of coated film products increased. In 2023, the company shipped 6.2 billion square meters of lithium battery diaphragms, achieving operating revenue of 10.082 billion yuan, a slight decrease of 5.22% compared with 2022, and gross margin of 39.83%, a slight decrease over the previous year. According to estimates, in 2023, the price of diaphragms was about 1.63 yuan/square meter, and the net profit of a single flat was about 0.43 yuan/square meter, all of which decreased by a certain margin compared to 2022. We believe that the decline in the profitability of the company's diaphragm products is mainly due to the release of production capacity in the second and third tier of the industry, and the intensification of competition in the industry. The company actively adjusted its business strategy to stabilize its market share, leading to a decline in product prices and profitability, but the share of coated film products with higher added value has increased. In 2023, the company will maintain its leading position in the industry, ranking first in the industry in terms of production capacity and shipment volume of diaphragm products. Looking forward to the future, as the industry's low-end production capacity gradually clears up in the second half of the year, the industry's supply and demand structure gradually stabilizes, and the company's many measures to reduce costs and increase efficiency, the price and profitability of its diaphragm products are expected to be repaired.

The company continues to increase investment in R&D to consolidate and enhance the company's core competitiveness. In 2023, the company's operating performance was under pressure, but R&D expenses were 727 million yuan, an increase of 6.04% compared to 724 million yuan in 2022; for 2024Q1, the company's R&D expenses were 153 million yuan, and the R&D cost rate was 6.58%, which fully reflects the company's R&D intensity and emphasis on new technologies and products.

In 2023, a new generation of ultra-high strength and high porosity base films for power independently developed by the company has entered the promotion stage; a new generation of low closed cell temperature and high safety diaphragms has been mass-produced; 2 production lines for semi-solid electrolyte coated diaphragms and various high-end coating diaphragms have entered trial production. Through continuous iteration of new products and advanced investment in R&D, the company is expected to provide customers with excess value, deepen cooperation with customers, enhance customer stickiness, and continuously enhance the company's core competitiveness.

Overseas base construction is progressing smoothly. Mass production is expected to begin in the second half of '23 to '24, and the global market share is expected to increase further. In 2023, the company is optimistic about the growth space of overseas markets and is actively developing overseas layout. Overseas sales revenue reached 2,017 billion yuan, a significant year-on-year increase of 51.45%, accounting for 16.75% of total revenue from 10.58% in 2022. In 2023, the company's lithium battery separator production base in Hungary has been completed, the first coating film production line has been launched, and the first base film production line has been completed. It is expected that it will respond quickly to the needs of customers in Europe and other places starting in 2024. Furthermore, in order to accelerate the progress of the company's US lithium battery isolation film project, quickly respond to the needs of customers in North America, and increase the global market share of the company's diaphragm products, the company adjusted the investment amount to about US$276 million in January 2024 to build 14 lithium battery coating diaphragm production lines with a total annual production capacity of 700 million square meters.

The BOPP film business has been rising steadily, and the aseptic packaging business has increased significantly. In 2023, the company's BOPP film business developed steadily, achieving a year-on-year increase in revenue of 11.28%; the company actively developed the sterile packaging business market, and sales of aseptic packaging products grew rapidly, achieving revenue of 778 million yuan, an increase of 25.47% over the previous year, and achieved sales volume of more than 4 billion units, an increase of more than 30% over the previous year.

The company's aseptic packaging products have excellent heat sealing performance, strong adaptability to the machine, low filling loss, etc. Product quality and performance indicators have all reached the leading level in the industry. In the future, the company will continue to strengthen market development, seize market growth opportunities with large dairy companies, and achieve rapid development of the aseptic packaging business.

Investment advice:

We lowered our performance forecast. The company's net profit for 2024-2026 is estimated to be 34.35/56.13/7.612 billion yuan, respectively (the previous forecast value for 2024-2025 was 59.60/7.189 billion yuan), EPS was 3.51/5.74/7.79 yuan, respectively. The PE corresponding to the current stock price is 11.25/6.88/5.08 times, respectively. Considering that the company is a leading company in the global diaphragm market, leading the world in production scale, from a short-term perspective, the industry is under pressure due to adjustments in the relationship between supply and demand, and from a long-term perspective, the company is expected to improve profitability through advantages such as increased online coating ratio and overseas market expansion, so it maintains a “buy” rating.

Risk warning:

The risk that downstream demand falls short of expectations; the risk that production capacity from overseas bases falls short of expectations; the risk that market competition increases; and the company's profitability falls short of expectations.