Company announcement: The company publishes the 2023 annual report and the 2024 quarterly report. 1) In 2023, the company achieved operating income of 1,475 million yuan (YoY +0.01%), net profit of 88 million yuan (YoY -21.04%), net profit of non-return of 81 million yuan (YoY -6.33%), of which 23Q4 achieved operating income of 358 million yuan (YoY +16.03%, QoQ -10.05%) and net profit attributable to mother of 18 million yuan (YoY -33.36). %, QoQ -11.76%). 2) In the first quarter of 2024, the company achieved operating income of 386 million yuan (YoY +21.47%, QoQ +7.82%), net profit to mother of 0.12 million yuan (YoY -47.91%, QoQ -33.33%), and net profit excluding non-return to mother of 0.1 billion yuan (YoY -53.16%, QoQ -33.33%). The performance was basically in line with expectations. The company plans to distribute a cash dividend of RMB 1.0 (tax included) to all shareholders for every 10 shares, and at the same time transfer 3 shares for every 10 shares to all shareholders using capital reserve.

In 2023, the price of the company's TPU products decreased and increased, and the market share continued to increase, and profitability was significantly dragged down by impairment. Demand for TPU resumed growth in 2023. According to the company's announcement, domestic consumption rebounded to about 610,000 tons, which is basically the same level of demand in 2021. However, due to increased competition from peers to expand production, combined with falling raw material prices, TPU prices fell 19.29% year on year; in terms of sales, the company achieved annual sales volume of 79,500 tons, up 25.6% year on year by tapping into market demand while promoting new products and cultivating market demand; in terms of profitability, the company's cost-side pressure gradually improved as upstream commodity raw material prices declined, and the overall gross profit margin was 14.04%, an increase of 0.46 pct year on year, but the combined impact of credit impairment losses and asset impairment losses affected the contract 10 million yuan dragged down the company's annual net profit by 1.54 pct year-on-year to 5.97%.

The revenue scale of 24Q1's TPU products grew steadily, and gross margin picked up at the bottom, but performance was also hampered by depreciation. Demand for downstream terminals gradually recovered after the 2024Q1 holiday, and the TPU boom picked up at the bottom. According to Baichuan statistics, the average market price of 24Q1 TPU products was 15,555 yuan/ton, an increase of 1% month-on-month, supporting the company's Q1 gross margin increase of 2.3 pct to 11.56% month-on-month. However, due to some inventory and credit impairment accrued by the company in the first quarter, the total impact on quarterly profit was about 8.28 million yuan, which dragged down the company's net interest rate of 2.16 pct to 3.19% month-on-month. The scale of the company will continue to expand in the future. The previous TPU production capacity was about 90,000 tons/year, and the new production capacity was 100,000 tons/year in the trial production stage, and the volume will double; at the same time, the company will continue to release high-end shoe materials and car clothing films, and the proportion of high-end products will increase rapidly.

The first phase of the Henan project is progressing smoothly, and the second phase of the project plan has been implemented, opening up room for the company's long-term growth. According to the company's announcement, in the first half of 2022, the company invested in the first phase of the polyurethane new material industrial park project through its subsidiary Meirui Technology (Henan), and plans to invest 1.5 billion dollars to lay out 120,000 tons/year of specialty isocyanate projects, including HDI 100,000 tons/year, CHDI 15,000 tons/year, and PPDI 0.5 million tons/year. Currently, the project has completed the construction of some units and roads, and some equipment has been installed. It is expected to be completed and put into operation in the first half of 2024. Since HDI terminals are used in high-precision fields such as high-speed rail finishes, aircraft coatings, and wind power blade coatings, while maintaining a global oligopoly pattern, the current market price is 31,500 yuan/ton, and the profitability is high. In addition to 200,000 tons/year of specialty isocyanate capacity expansion, the second phase of the project plans to invest a total of 5.2 billion yuan in products such as mesophenylenediamine, resorcinol, and acyl chloride, and achieve operating income of more than 20 billion yuan. In addition, the company's Henan base currently has a land plan of 1,000 acres, and there is still 1,500 acres of land development space in the future. Through the construction of this project, it will extend the company's industrial chain, achieve self-supply of some core raw materials for special TPU, reduce production costs, and open up room for growth.

Profit forecast and investment rating: Affected by increased competition in the industry, the company's main products fluctuated at the bottom. As a result, the company's profit forecast for 2024-2025 was lowered to achieve net profit of 2.58 billion yuan and 538 million yuan (409 million yuan and 644 million yuan respectively before adjustment), and the profit forecast for 2026 was added. It is estimated that net profit to mother will be 742 million yuan, corresponding to PE of 24X, 12X, and 8X. Since the company's Henan project is completed, its performance is expected to improve rapidly. The compound profit growth rate of the company is expected to reach 72.5% in 2024-2026, corresponding to the 24-year PEG valuation of 0.3X. Therefore, the valuation premium brought about by the company's future growth is still not fully reflected, maintaining a “buy” rating.

Risk warning: The commissioning of new projects falls short of expectations; downstream demand falls short of expectations.