Incident: The company released its 2024 quarterly report. During the reporting period, it achieved operating income of 1,967 billion yuan, a year-on-year increase of 6.91%, and net profit of 62 million yuan, a year-on-year increase of 257%, after deducting non-net profit of 60 million yuan, an increase of 365.6% over the previous year, turning a sharp loss into profit over 2023Q4, exceeding market expectations.
The gross margin and sales volume of viscose filament increased during the reporting period, and the new supply of the industry was strictly limited. During the reporting period, benefiting from the increase in the gross margin of viscose filament and the increase in sales volume, the company's performance increased sharply year on year; in the first quarter of 2024, the company's comprehensive gross profit margin was 10.74%, up 2.25 pcts from the previous month, and 3 pcts higher than last year's gross margin. After years of reshuffle in the domestic viscose filament industry, industry concentration increased dramatically. By the end of 2023, there were only four domestic manufacturers, with Xinxiang chemical fiber production capacity of 90,000 tons/year, accounting for nearly 40% of the domestic market, with strong market control. After the Russian-Ukrainian conflict broke out, European viscose filament companies faced high energy cost pressure and their competitiveness declined, and domestic viscose filament companies are expected to further seize global market share. Currently, it is strictly prohibited to build new viscose filament projects domestically, and the industry's new production capacity is strictly limited.
Supply and demand for viscose filament are tight and prices are rising, and the second-quarter results are expected to continue to increase sharply from month to month. In recent years, with the revival of Guochao culture and traditional culture, Hanfu has become more and more popular among young people. The size of the domestic Hanfu market has continued to rise, reaching 14.47 billion yuan in 2023, an increase of 15.4% over the previous year, and a compound annual growth of 33.8% since 2019. Hanfu sales have risen sharply since this year. Viscose filament is the first choice for making medium and high-end horse mask skirts, and the rapid increase in demand for Hanfu will also greatly boost demand in the domestic viscose filament market. Since the end of March, domestic viscose filament companies have raised their prices several times. Due to limited supply in the industry and strong downstream demand, the relationship between supply and demand in the industry continues to tighten, and further price increases are expected in the future.
The price of spandex is at the bottom of recent years, and there is an expectation that there will be a marginal improvement in the supply and demand relationship. The average price of spandex in the domestic market in the first quarter of 2024 was 29,800 yuan/ton, down 5.2% from 2023Q4. However, benefiting from the drop in raw material prices, the spandex price spread increased by about 906 yuan/ton month-on-month, and profitability improved. In recent years, leading domestic spandex companies have continued to expand production, some small and medium-sized enterprises have withdrawn, and industry concentration has increased markedly. Currently, the spandex industry is planning to build a lot of new production capacity, but due to the sharp drop in spandex prices, there is great uncertainty about the actual commissioning. It is expected that the industry's new effective production capacity will slow down in 2024, and there is a marginal improvement in the supply and demand relationship of spandex.
Maintain an “overweight” investment rating. Due to the recent continuous rise in the price of viscose filament, we raised our profit forecast. We expect the company's net profit to be 404 million, 615 million yuan, and 782 million yuan respectively in 2024-2026, and EPS 0.28, 0.42, and 0.53 yuan respectively. The current stock price corresponds to PE 15, 10, and 8 times, respectively, to maintain the “increase in wealth” investment rating.
Risk warning: falling product prices, fluctuating raw material prices, downstream market demand falling short of expectations.