Key points of investment:
The company announced its 2023 annual report and 2024 quarterly report: 1) Achieved revenue of 2,597 million yuan (YoY -3.23%) in 2023, realized net profit of 253 million yuan (YoY -23.3%), and realized net profit of 240 million yuan (YoY -21.6%), of which 23Q4 was about 693 million yuan (YoY +4.4%, QoQ +7.3%), achieving net profit attributable to mother of 48.3 million yuan (YoY -40.4%, QoQ -27.2%) 45.39 million yuan (YoY -40.5%, QoQ -27%). 2) In the first quarter of 2024, revenue of 744 million yuan (YoY +12.3%, QoQ +7.3%) was achieved, net profit attributable to mother was 76.12 million yuan (YoY -2.8%, QoQ +57.6%), and net profit not attributable to mother was 72.87 million yuan (YoY -3.9%, QoQ +60.5%), which is in line with expectations.
Revenue and profits declined in 2023 due to falling prices of fatty amines and the removal of spices from Givaudan. According to the company's operating announcement, 1) Fatty amines: Achieved revenue of about 1,232 billion yuan (YoY -14%) in 2023, with production and sales volumes of about 1012,000 tons (YoY -5%) and 101,000 tons (YoY -6%), respectively. Mainly due to isopropylamine maintenance over 1 month in the third quarter, which affected production and sales of fatty amines, the price fell by about 9% to 12,200 yuan/ton, and gross margin fell 4.21pct to 16.56% year on year. 2) Organic solvents: Revenue of 487 million yuan (YoY +12%) was achieved in 2023, thanks to a year-on-year increase in production and sales volume of 18% and 21% to 60,600 tons and 612,000 tons, respectively. Mainly due to the company's advantages in the propylene process, the gross margin increased by 5.05 pct to 30.55% year on year. 3) Fragrances: Revenue of 520 million yuan (YoY -1%) was achieved in 2023, and production fell 4% year on year to 151,000 tons. In addition, due to falling prices of raw materials such as upstream turpentine, product prices fell about 3% year on year to 35,000 yuan/ton, affecting the gross margin decline of 3.57 pct to 20.58% year on year. 4) In addition, the company confirmed the salt lake lithium extraction project and sales of extractants in 2023. Overall, the remaining business revenue was about 330 million yuan (YoY +22.4%), and gross margin increased 8.49 pcts to 39.3% year over year. Overall, the company's gross margin fell slightly by 0.31pct to 23.26% year on year in 2023. The overall cost ratio increased along with the layout of the new business, which affected the year-on-year decline in net profit margin by 2.62 pct to 11.12%.
23Q4 Fatty amine production resumed and fragrance storage completed, and main business resumed month-on-month, but as Q3 confirmed the Salt Lake project, Q4 profitability declined somewhat. According to the company's business announcement, revenue from 23Q4 fatty amines, organic solvents, and perfumes increased 33%, 9%, and 47% year-on-year respectively to 326 million yuan, 126 million yuan, and 173 million yuan, respectively. Among them, fatty amines increased significantly month-on-month due to Q3 maintenance and the resumption of production in Q4; the fragrance business also increased month-on-month due to customers such as Q2-Q3 Givardon being removed from storage. However, 23Q3 confirmed that the high-margin Salt Lake Lanke Lithium Project had revenue exceeding 90 million, so other businesses declined month-on-month, causing the overall gross margin to fall 6.71 pcts to 19.54% month-on-month, affecting the net profit margin falling 3.86 pcts to 8.2% month-on-month. The 24Q1 fatty amine peak season increased month-on-month, and sales of superimposed fragrances reached a record high, and profitability recovered month-on-month. According to the company's operating announcement, aliphatic amine revenue in 24Q1 increased 11% year on year to 362 million yuan. Thanks to the relatively high downstream demand season for the main products in Q1, such as isopropylamine and triethylamine, sales of fatty amines increased 13% month-on-month to a record high of 30,800 tons. Furthermore, with the gradual commissioning of the Ningxia project, revenue and fragrance also reached new highs, increasing 7% and 12% month-on-month to 185 million yuan and 5,385 tons, respectively. Overall, Q1 gross margin increased 2.74 pct to 22.28% month-on-month, driving net profit margin to increase 3.69 pct to 11.89% month-on-month.
The aliphatic amine project continues to expand its layout. Based on the company's strategic development and business needs, the company plans to invest a total of 1,598 billion yuan to build a new material relocation and upgrading project with an annual output of 730,000 tons at the Ocean base (Xinhua Stock Industrial Base Phase I), including 10,000 tons/year of special amine, 10,000 tons/year of formylated materials, 3,000 tons/year of TMDD, 20,000 tons/year isophorone, 10,000 tons/year ethylbutylamine series products, 10,000 tons/year of acetylamine series products, 10,000 tons/year, and a total of 8 production lines. The project is expected to be built in 2 phases, each with a construction period of 2 years. Later, there was a marked increase in fragrance equity production capacity, and the gradual increase in volume contributed to the certainty of growth in the main business. According to the company's announcement, by the end of the first quarter of 2024, the company's projects under construction had increased by another 45.31 million yuan to 1,153 billion yuan compared to the end of the year. The main projects under construction were Ningxia Fragrance and Ningxia Xinhua's new phosphine-containing new material product projects. At present, the first phase of the Ningxia project has been put into operation, and the output is expected to reach 10,000 tons in 2024. Subsequently, Xinrui Fragrance added 18,000 tons of fragrance production capacity, which is expected to be put into operation by the end of '24. The company's fragrance equity production capacity is expected to increase nearly 10 times within the next 3 years. The company actively connects with battery recycling companies and automakers, and gradually opens up a 100 billion battery recycling market.
The company announced earlier that it cooperated with Geely Yaoning on the battery recycling project. It is expected that the first phase of the battery black powder recycling project will be put into operation in the second half of the year. After the construction and operation of the first phase of the project is completed, the second phase will add 40,000 tons/year of waste lithium battery recycling. The third phase will add 50,000 tons/year of waste lithium battery recycling, for a total of 100,000 tons of lithium batteries. With its own extractant advantages, Xinhua has a high lithium recovery rate and low recycling costs. Currently, it is gradually cooperating with automakers and battery recycling companies. The project is the company's first battery resource recycling project, and will gradually enter the 100 billion battery recycling market in the future.
Profit forecast and valuation: Considering the loss of production in the early stages of the fragrance business, adding a slight decline in the profit forecast for 2024-2025, and adding the 2026 profit forecast, the estimated three-year net profit of 3.65, 4.64 (original forecast is 4.22, 556 million yuan), and 552 million yuan, corresponding to PE of 13, 11, and 9 times PE, with reference to Fragrance Corse shares and battery recycling Grimmie's 24-year average PE (Wind agrees), maintaining the “buy” rating.
Risk warning: Fragrance production capacity falls short of expectations; battery recycling project progress falls short of expectations.