Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 3,925 billion yuan, a year-on-year increase of 4.67%, net profit of 333 million yuan, a year-on-year decrease of 23.59%, after deducting net profit of 235 million yuan, a year-on-year decrease of 25.79%; of these, it achieved revenue of 1,015 million yuan in a single quarter, an increase of 7.16% year-on-year, and net profit of 55 million yuan, a year-on-year decrease of 58.36%. 2024Q1 achieved revenue of 966 million yuan, a year-on-year decrease of 4.55%, and net profit to mother of 25 million yuan, a year-on-year decrease of 81.43%.

Spandex prices are under pressure, dragging down 24Q1 performance. In 2023, the company achieved significant growth in production of all products. As production capacity of aramid products was gradually released, profits increased steadily. However, due to the low price of spandex combined with the company's increased investment in new production capacity, profits were squeezed, and the growth of the aramid business was insufficient to make up for the decline in the spandex business, leading to a decline in profits. In 2023, the company's aramid business achieved revenue of 2,406 billion yuan, yoy +12.64%, gross profit margin of 40.82%, yoy +0.36 pct, output 18,900 tons, sales volume 17,200 tons; the spandex business achieved revenue of 1,489 million yuan, yoy -6.96%, gross profit margin -3%, yoy -3.16 pct, output 63,200 tons, sales 51,600 tons. At the same time, the company improved the global marketing network layout and achieved overseas sales revenue of 907 million yuan, yoy +13.35%, gross profit margin of 39.45%, and yoy +2.64 pct. The company's performance declined year-on-year in 2024Q1. Mainly spandex products were affected by market conditions and other factors, and profits declined sharply.

24Q1 The price of spandex declined slightly, and the company's spandex implemented a switch between old and new kinetic energy. According to statistics from the Chemical Fiber Information Network, in 2023, the global production capacity of spandex was 1.63 million tons, and the domestic production capacity was about 1.23 million tons, an increase of 13% over the previous year. Due to the acceleration of industry capacity expansion, the industry was in a state of oversupply, and spandex prices continued to fluctuate at a low level. According to Baichuan Yingfu, the average prices in the 23Q4 and 24Q1 spandex markets are 3.04 and 28,700 yuan/ton respectively. Currently, the average price of spandex 40D is 27,500 yuan/ton. The industry's profit situation is poor, and most companies are in a state of loss. Since the industry is still at its peak of expansion in 2024 (additional production capacity of about 300,000 tons during the year), spandex prices are expected to fluctuate at the bottom in the short term. In 2023, the company promoted the construction of new projects and implemented the conversion of old and new kinetic energy. By the end of 2023, the company's effective production capacity of spandex was about 70,000 tons, but due to the centralized investment of new production capacity, the commissioning period for the new production line was too long, and the price of superimposed spandex was low, and the spandex business experienced large losses. It is expected that as the commissioning of the company's production line is completed and the operating rate increases, the cost per ton will continue to decrease, and profitability will be restored.

The price of aramid has declined, and long-term market demand is improving. In 2023, the global nominal production capacity of aramid was about 150,000 to 160,000 tons, an increase of about 10% over the previous year, and global demand was about 120,000 to 130,000 tons, an increase of about 11% over the previous year. The company's aramid production capacity was about 26,000 tons, ranking third in the world. In terms of aramid, central state-owned enterprises and others in the field of protection have gradually begun to be equipped with flame retardant protective clothing, but chemical parks where small and medium-sized enterprises gather are progressing relatively slowly. Combined with the decline in bidding and procurement activities in that year, domestic demand in the field of protection weakened; the industrial filtration sector was affected by weak demand from industries such as cement, steel, road construction, etc., and price competition intensified, and product pricing was adjusted. In terms of aramid, demand for information and communication infrastructure began to weaken, and factors such as continued EU anti-dumping measures against Chinese optical cables and geopolitical conflicts had an adverse impact on demand. At the same time, international leaders gradually resumed supply and began adopting relatively aggressive competitive strategies at 23H2, leading to a drop in prices. However, in the long run, with the upgrading of personal protective equipment standards and the continuous development of fields such as new energy vehicles, industrial and commercial energy storage, commercial aviation, general aviation, rail transit, etc., the application scenarios of aramid will continue to expand, and market demand will continue to grow.

The incremental business progressed smoothly, creating a new profit growth pole. In terms of incremental business, 1) Smart Fiber: The company's Lightmax Smart Fiber products have been sold in batches. The world's first lithium fiber battery pilot line was completed and put into operation in April. Indicators such as cycle performance, ratio performance, and energy density reached commercial levels, and it is planned to be officially launched on the market in 2024. 2) Green printing and dyeing: The company Ecody @纤维绿色化处理项目于2023Q4建成投产 is mainly in the marketing and product testing stages. 3) Aramid diaphragm: The aramid diaphragm project has passed on-site audits by many battery customers, and has also made good progress in projects such as power batteries, household storage batteries, low temperature batteries, and semi-solid state batteries. Some customers have achieved small-batch orders, and new workshops and production lines are already under construction.

Maintain an “overweight” investment rating. Based on the low price of spandex dragging down the company's profit forecast, the company's net profit forecast for 2024-2026 is estimated to be 4.8, 5.9 billion yuan, and 7.0 billion yuan respectively, EPS 0.56, 0.68, and 0.81 yuan, respectively. The current stock price corresponds to PE of 20.0, 16.4, and 13.8 times, respectively, to maintain the “gain” investment rating.

Risk warning: Product prices fell sharply, raw material prices fell sharply, and the commissioning of new production capacity fell short of expectations.