Incident The company released the 2023 annual report and the 2024 quarterly report. In 2023, the company achieved operating income of 3,925 million yuan, an increase of 4.67% over the previous year; net profit to mother was 333 million yuan, a year-on-year decrease of 23.59%. The first quarter of 2024 achieved operating income of 966 million yuan, a year-on-year decrease of 4.55%; net profit to mother was 0.25 million yuan, a year-on-year decrease of 81.43%.

The aramid business grew steadily, and the decline in spandex profits dragged down 2023 performance. In 2023, the company actively promoted the construction of various projects. Production and sales volume of main products increased 4.67% year-on-year. Among them, the company achieved 63218 and 51,550 tons of spandex, up 60.51% and 28.57% year on year; aramid production and sales volume of 18,948 and 17,154 tons, up 25.86% and 21.32% year on year respectively; sales gross margins of spandex and aramid were -3.00% and 40.82% respectively, with year-on-year changes of -3.16 and 0.36 percentage points, respectively. By business, with the gradual release of production capacity, profits of aramid series products have increased steadily; competition in the spandex industry has become more intense, product prices have continued to fall, and the company's new production capacity has been concentrated, and the production line commissioning period is too long, leading to large losses in the spandex business. The growth of the aramid business in 2023 was insufficient to make up for the decline in spandex profits, and the company's overall performance declined under pressure. The sharp year-on-year decline in spandex profits in 24Q1 is still the main factor dragging down the company's performance.

The spandex industry is under high supply pressure in the short term. We are waiting for the boom to bottom up and recover. Domestic spandex production capacity will be about 1.23 million tons/year in 2023, an increase of 13% over the previous year. Demand for spandex increased in 2023 with the recovery of downstream demand and expansion of application areas, but due to the acceleration of production capacity expansion, the industry continued to be oversupplied, and most companies were in a state of loss. Looking ahead to 2024, on the one hand, demand in the downstream textile and garment industry is expected to pick up, but the spandex industry is expected to increase production capacity by 300,000 tons/year. At the peak of production expansion, the price of spandex is expected to fluctuate narrowly around the cost line. The company's spandex has two bases in Yantai and Ningxia. By the end of 2023, the nominal production capacity of spandex was about 100,000 tons/year, ranking fifth in the country. In 2023, the company implemented the conversion of old and new kinetic energy, spandex production efficiency was improved and production costs were reduced. Currently, the domestic market share is about 5%-10%. We believe that spandex is operating at a low level due to supply pressure in the short term; in the medium to long term, downstream textile garment demand is expected to grow steadily, waiting for the economy to bottom up as production capacity is digested.

Aramid has broad development prospects. The expansion of production capacity consolidates its leading position along with the promotion of China's personal protective equipment standards and the increase in the country's requirements for personal protective equipment, and the demand for flame retardant protection market is expected to continue to expand; aramid coating for lithium battery diaphragms will also open up new growth space for aramid; at the same time, aramid, there is a large import substitution and export space for aramid, especially for aramid. At the end of 2023, the company's nominal aramid production capacity was about 26,000 tons/year. The company has become one of the world's leading enterprises with a complete variety structure, with a domestic market share of about 50%-60%. Currently, the company has a production capacity of 26,000 tons/year. Aramid has technical barriers and a high market threshold. The company has mature technology and can be mass-produced. By continuing to increase the aramid business, it is expected to continue to consolidate its leading position in the industry.

Joint Xingyuan Materials released a new aramid coated diaphragm product, drawing a new chapter in global diaphragm materials. Recently, the company and Xingyuan Material jointly funded the establishment of Yantai Xinghe Battery Material Technology Co., Ltd. The two sides used their respective expertise in material science and lithium battery technology to jointly build high-quality Star and SAFEBM aramid coated diaphragms. Compared with today's mainstream ceramics or PVDF coatings, Star and SAFEBM aramid coated diaphragms have better thermal performance, liquid absorption, liquid retention, and lighter weight, which can improve the electrical performance, safety, and manufacturing efficiency of batteries, especially in electric vehicles and large-scale energy storage solutions. Future Star and SAFEBM aramid coated diaphragms have room for further cost reduction, and with their excellent performance, the penetration rate in coating materials is expected to increase rapidly. We believe that as the company's aramid coated diaphragm business progresses steadily, it is expected to contribute new profit growth points in the future.

The investment proposal estimates that the company's revenue for 2024-2026 will be 41.49 billion yuan, 50.04, and 6.066 billion yuan, respectively; net profit to mother will be 2.98, 4.01, and 606 million yuan, respectively, with year-on-year changes of -10.65%, 34.83%, and 50.98%; EPS is 0.34, 0.46, and 0.70 yuan respectively, corresponding PE is 32.40, 24.03, and 15.91 times, respectively, maintaining the “recommended” rating.

Risks indicate the risk that downstream demand falls short of expectations, the risk of a sharp rise in raw material prices, and the risk of new construction projects falling short of expectations.