Incident: On April 25, 2024, the company released its 2023 annual report & 2024 quarterly report. The company achieved revenue of 742 million yuan for the full year of 2023, -10.74%; net profit to mother of 174 million yuan, +15.54% year over year; deducted non-net profit of 177 million yuan, +18.23% year over year. Among them, Q4 achieved revenue of 216 million yuan in a single quarter, +0.14% year over month, +44.97% month on month; net profit to mother of 0.53 million yuan, -5.36% year on year, +55.88% month on month; deducted non-net profit of 52 million yuan, -7.19% year on year, +48.57% month on month. In the first quarter of 2024, the company achieved revenue of 147 million yuan, -23.34% YoY, -31.94%; net profit to mother of 0.42 million yuan, -12.39% YoY and -20.75% month-on-month; net profit of 44 million yuan, -8.49% YoY and -15.38% YoY.

The company's sales price has declined, but lower costs have contributed to a significant increase in gross margin. Taking the raw material data for the company's main product, hair dye, as an example, the annual revenue and sales volume of 2023 were 545 million yuan and 1847.30 tons, respectively, with an average price of 295,200 yuan/ton; the average price for the first quarter of 2024 was 273,300 yuan/ton, and the price declined slightly. At the same time, the company's costs have also declined. According to the company's announcement, the overall gross margin for the full year of 2023 and the first quarter of 2024 was 40.33% and 45.97%. The decline in costs contributed to a significant increase in gross margin. As downstream demand for hair dyes gradually grows, we expect the company's product prices to return to an upward trend in the future.

The company has many projects under construction, so I am optimistic about the company's long-term growth. As of the 2024 quarterly report, the company's projects under construction are about 204 million yuan, including the “Special Material Monomer and Hairdressing Aid Project with an annual output of 1,320 tons” and the “Special Material Monomer and Additives Project with an annual output of 5,000 tons (Phase I project)”. The first phase of the former, 555 tons, is expected to be put into trial production by the end of May 2024, and the latter, with 1,200 tons under construction, is expected to be put into trial production by the end of June 2025. According to the company's prospectus data, the company has a production capacity of 3050 tons/year in 2022. It is expected that after the company's projects under construction are put into operation between 2024-2025, it is expected that the company's product production capacity will be greatly increased and profits will increase.

Investment advice: The company is a leading domestic manufacturer of raw materials for hair dyes. At the same time, it has a single production capacity for special engineering materials, with remarkable technical advantages. We expect the company to achieve operating income of 883/10.59/1,231 million yuan in 2024-2026 and achieve net profit of 235/2.95/428 million yuan, corresponding PE of 19.79/15.79/10.87 times, respectively, and maintain the “increase” rating.

Risk warning: Market demand falls short of expected risk; the company's newly built production capacity falls short of expected risk; competition in the same industry increases risk