Incident: The company released its 2023 annual report and 2024 quarterly report. It achieved full-year revenue of 1,556 billion yuan, a year-on-year decrease of 9.7%, and net profit to mother of 220 million yuan, a year-on-year decrease of 37.76%. In the first quarter of 2024, the company achieved revenue of 435 million yuan, a year-on-year increase of 16.1%, and net profit to mother of 53.6 million yuan, a year-on-year decrease of 26.37%. In addition, the company plans to pay a cash dividend of 2 yuan (tax included) for every 10 shares, with a total dividend of 68.34 million yuan, accounting for 31.03% of the 2023 profit. We believe that the increase in the company's revenue and profit in the first quarter of 2024 was mainly due to the fact that the new cellulose ether production capacity at the Gaoqing Plant was put into operation. It took time for the operating rate of production capacity to rise, and the impact of the depreciation of the new production capacity was high. As the operating rate of the new plant increases, overseas vegetable capsules are removed from inventory, and sales of vegetable capsules and cellulose ether are expected to increase dramatically year-on-year. This year will be the starting point for the company to take off for the second time.

Move forward in 2023, and continue to pursue high-quality development in 2024. In 2023, under the complex economic situation at home and abroad, the company insisted on being customer-oriented, quality-centered, and continuously strengthened its operation and management capabilities. Through the acquisition of China Forheda, the company realized the deepening of the company's integrated strategy in terms of horizontal expansion. While expanding and extending the upstream and downstream industrial chains, the company continued to improve the cellulose ether product portfolio, enhance the company's hydroxyethyl cellulose (HEC) R&D, production, sales and service capabilities, and enhance the overall competitiveness of the market.

The company always focuses on improving products and technology. In the field of cellulose ether building materials, diversified modified products, high-end tile adhesive products, and HEC series products meet the different needs of customers and continue to penetrate high-end overseas markets; in the field of cellulose ether pharmaceuticals, high-end coating products have achieved breakthroughs, broken the long-term dependence of this series of products on imports, improved the performance of slow release products, and continued to strengthen cooperation with pharmaceutical companies; in the field of vegetable capsules, second-generation capsules have been successfully registered and obtained 2 national invention patents, which have been widely recognized by domestic and foreign customers; anti-acid capsules and capsules have been successfully developed and certified by customers The line is becoming more and more abundant, and it can provide customers with various types of capsules in different regions and with different needs. In 2024, the company will continue to pursue high-quality development. By adjusting the product and market structure, upgrading and expanding to high-value-added fields, pharmaceutical and food-grade cellulose ethers with a wide range of application scenarios have real potential for growth, and it is also an area that competes with international giants. The company will further increase investment in the pharmaceutical and food sector, build R&D centers, and introduce R&D equipment and high-end R&D talents, so that high-value-added products can bring greater profit margins.

The most stressful moment is over, and the company is about to enter the 2.0 phase of rapid development. The company achieved revenue of 435 million yuan in the first quarter of 2024, and revenue continued to improve in the single quarter. In addition to the fact that the company's new high-grade cellulose ether plant has begun to release production capacity, trial production of pharmaceutical and food-grade cellulose ether has also begun. All fixed assets for the new production capacity have been converted, and depreciation expenses have also increased, so there was no increase in revenue in the first quarter. Furthermore, Fukugawa's original acetic acid products were discontinued and production equipment was reduced. Revenue and profit decreased compared to last year, but with the rapid increase in the utilization rate of cellulose ether production capacity and the removal of overseas vegetable capsules from inventory, we think that overall, the time of greatest pressure on the company has passed. Various businesses have already made significant improvements. Fukugawa's former acetic acid business products have been discontinued, causing a value loss of about 24 million yuan. This business will no longer slow down the company's development. In the future, the company will start lightly and usher in a 2.0 stage of rapid development. The company has a total production capacity of 85,000 tons of cellulose ether. It is a leading domestic cellulose ether enterprise. At the same time, the company is also developing new customers in new application fields. These new products are more expensive and more profitable. In the field of vegetable capsules, the company is a global industrial chain integration company for vegetable capsules. Currently, the company has a production capacity of 50 billion capsules. As foreign capsule inventory removal ends and normalization returns, demand for vegetable capsules is expected to pick up, and production capacity operating rate will further increase. At the same time, the more expensive second-generation vegetable capsules have also been verified and mass sales have begun.

Maintain a “Highly Recommended” investment rating. The company's revenue for 2024-2026 is estimated to be RMB 1,776 million, RMB 2,334 million and RMB 2,775 million, with net profit attributable to mother of RMB 303 million, RMB 431 million and RMB 550 million respectively, and EPS of RMB 0.89, RMB 1.26 and RMB 1.61 respectively. The current stock price corresponds to PE of 15.8 times, 11.1 times, and 8.7 times, respectively

Risk warning: New project construction falls short of expectations, and product sales fall short of expectations.