2024Q1's performance was in line with expectations. Demand from the main business improved, and fiber profits were under pressure. It maintained a “buy” rating of 2024Q1 revenue of 360 million yuan (+10.3% year over year, same below), net profit of 37 million yuan (+15.4%) to mother, and net profit of 32 million yuan (+4.7%) after deducting net profit of non-return to mother. We maintain our profit forecast. The net profit for 2024-2026 is estimated to be 2.4/29/330 million yuan, corresponding to EPS of 0.7/0.8/0.9 yuan. The current stock price corresponds to PE of 14.2/11.9/10.5 times. It is expected that the main business will improve efficiency, ultra-high production capacity will rise and quality will improve. At the same time, the nylon business will accelerate construction, and we are optimistic that the company will become a new material application enterprise and maintain a “buy” rating.
Traditional business: The 2024Q1 imitation woolen fabric business faces a high foreign trade base, and revenue from major clothing customers improved fabrics declined slightly: 2024Q1 revenue is expected to be 189 million yuan (-5%). Among them, due to a drop of ~ 20% in the high base, domestic trade is basically flat. As technology reform projects are gradually completed and the company increases investment in high value-added products, the gross margin is +3.1 pct to 34.76%. Order shipments from major clothing customers: 2024Q1 revenue is expected to be 130 million yuan (+20%), and the number of orders in the 2023 bidding will gradually increase. However, due to the long supply cycle of fabrics in the early stages of clothing, orders from 2024Q1 high-value-added customers have begun to be shipped, driving the gross margin to increase by 2.23pct to 33.71%.
New materials: 2024Q1 volume has increased significantly & orders are full. Q2 is expected to reach an inflection point in demand, and nylon is progressing smoothly (1) UHMWPE fiber: the second phase of 3,000 tons will be put into operation at the end of August 2023. The revenue of 2024Q1 is expected to be 34 million yuan, with sales volume of 410-420 tons. Affected by product structure and industry policy adjustments, the average price per ton is expected to be around 60,000 yuan/ton. Currently, orders are full and orders are scheduled for 1-2 months. It is expected that 2024Q2 policy easing and application product restructuring will improve. Overall production is expected to be around 4,000 tons in 2024. (2) Nylon: Civil construction completed, equipment laid out normally, the 80,000-ton high-performance differentiated nylon filament project progressed steadily, and the core equipment manufacturer Oerlikon Barmag collaborated strategically to promote the vertical extension of the new materials industry chain.
The profitability of 2024Q1 increased slightly. The increase in the cost ratio during the period was mainly due to the profitability of second-phase investment and interest conversion: 2024Q1 gross margin was 32.8% (+0.1pct), and the period expense ratio was 19.3% (+1.0pct), with sales/management/finance/R&D expense ratios +0.6/+1.2/-0.5/+1pct respectively. The increase in management expenses was mainly due to increased investment and operation costs for the second phase of the ultra-high phase. The 2024Q1 net profit margin was 10.3% (+0.4pct), and profitability was steady. (2) Operating capacity: As of the end of 2024Q1, the net cash flow from operating activities was -1.82 million yuan (100 million yuan for the same period, +98.2%). The cash flow situation improved. The inventory balance at the end of 2024Q1 was 650 million yuan (-2.6%), and the number of inventory turnover days was 248 days (+28 days).
Risk warning: Production capacity investment falls short of expectations, downstream demand is weak, and market competition intensifies.