Incident 1: The company released its 2023 annual report. In 2023, the company achieved revenue of 4.738 billion yuan, an increase of 11.24%; achieved net profit of 579 million yuan, an increase of 10.43% over the previous year; and realized net profit of 558 million yuan after deduction, an increase of 0.69% over the previous year. With 2023Q4, the company achieved revenue of 1,196 billion yuan in a single quarter, an increase of 9.49% year on year and a decrease of 1.89% month on month; net profit to mother was 98.88 million yuan, up 60.96% year on year and down 28.98% month on month.

Incident 2: The company released its 2024 quarterly report. With 2024Q1, the company achieved revenue of 1,618 billion yuan in a single quarter, up 51.09% year on year and 35.30% month on month; realized net profit of 246 million yuan, up 42.21% year on year, up 149% month on month; realized net profit after deduction of 239 million yuan, up 55.67% year on year and 227% month on month.

Comment:

Revenue from electronic materials remained flat, and revenue from LNG insulation materials doubled. In 2023, the company's electronic materials, LNG insulation materials and flame retardants business revenue was 3.21 billion yuan, 860 million yuan and 270 million yuan respectively, with year-on-year changes of -0.65%, +114%, and -34.5% respectively. In terms of electronic materials, although global demand for semiconductors was weak in 2023, putting pressure on the price of related products, the company's sales of electronic materials remained basically the same as in '22 when the company bucked the trend. In 2023, the company achieved a total sales volume of 112,900 tons of specialty gases, semiconductor materials, and flame retardants, an increase of 39.1% over the previous year. Among them, sales of photoresists and their supporting reagents increased dramatically.

In terms of LNG insulation materials, thanks to strong demand for LNG ship materials from major customers such as companies affiliated with China Shipbuilding Group and Beijing Gas's large-scale land storage tank materials, the company achieved sales volume of 102,000 cubic meters of LNG insulation materials in '23, a sharp increase of 114% over the previous year. In terms of costs, the company continued to maintain a high R&D intensity. In '23, the company's R&D expenses reached 190 million yuan, an increase of 48.8% year on year, and R&D expenses increased 1.02 pct to 4.02% year on year.

The company's sales/management/financial expense ratios in '23 were 3.25%, 8.64%, and -0.48%, respectively, with year-on-year changes of +0.40pct, -0.38pct, and +0.50pct, respectively.

Jiangsu Xianke's Yixing base was put into operation. It plans to acquire SKC-ENF to lay out wet electronic chemicals and promote the construction of a strategic emerging materials platform. In terms of precursors, Jiangsu Xianke's Yixing production base was successfully built in 2023. Silicon precursor products have been shipped steadily, and samples of high-K precursor and metal precursor products have been shipped normally. In terms of photoresists, the company's self-developed OLED low-temperature RGB photoresists and advanced packaging photoresists have made breakthrough progress, and have now entered the client-side testing and introduction stage. In terms of specialty gas, the company's subsidiary Kemet continues to invest in research and development around fluorine chemical high value-added products, and related electronic grade products have been introduced into the supply systems of semiconductor and panel manufacturers.

In terms of silicon powder, the company's subsidiary Huafei Electronics' new products CCL and spherical alumina have made breakthrough progress, and stable supply to customers has begun. Research and development of high-end sub-micron spherical silica is progressing smoothly. In terms of the LDS system, the company's LDS system has been certified and approved by major customers in central China, and production capacity expansion is progressing in an orderly manner. In addition to the existing business mentioned above, in September 2023, the company issued an announcement stating that it intends to purchase 75.10% of SKC-ENF's shares held by SkenPulse at a price of no more than 50 billion won. Through this acquisition, the company will further enrich the product range in the electronic materials business segment and expand the production capacity of wet chemicals used in semiconductor materials.

Profit forecast, valuation and ratings: The company released a significant amount of electronic materials and LNG insulation materials in 2023, but due to weak downstream demand for electronic materials, the company's performance was slightly lower than previously expected. Considering that the current prices of related electronic materials products are still low, we lowered the company's 24-25 profit forecast and added a 26-year profit forecast. The company's net profit for 24-26 is estimated to be 9.68 (down 9.0%)/12.03 (down 10.6%)/1,452 billion yuan, respectively. The company continues to build a strategic emerging materials platform enterprise, which can be expected to grow in the future and maintain an “gain” rating.

Risk warning: Product certification risk, capacity construction risk, product and raw material price fluctuation, downstream demand falls short of expectations.