Description of the event

On April 30, 2024, Cathay Biotech released its 2023 Annual Report and 2024 Quarterly Report.

The company achieved operating income of 2,114 billion yuan in 2023, a year-on-year decrease of 13.39%; net profit to mother was 367 million yuan, a year-on-year decrease of 33.75%; net profit after deducting non-return to mother was 307 million yuan, a year-on-year decrease of 44.67%.

In the first quarter of 2024, we achieved operating income of 685 million yuan, up 35.43% year on year and 24.76% month on month; net profit to mother was 105 million yuan, up 83.25% year on year, up 99.96% month on month, after deducting net profit of 103 million yuan, up 100.99% year on year and 103.19% month on month.

Demand for the main products picked up, and 2024Q1's performance increased sharply in 2023. The company's revenue in 2023 was in line with expectations. The main product, long-chain diacid, was affected by the international market environment and insufficient downstream demand, but it still maintained its dominant position in the global market. 2023Q4 achieved operating income of 549 million yuan, down 9.07% year on year, up 2.55% month on month; net profit to mother was 53 million yuan, down 21.53% year on year, down 26.92% month on month, after deducting net profit of 51 million yuan, down 11.54% year on year and 3.82% month on month. The pressure on performance is mainly due to insufficient downstream demand. When production of the company's long-chain binary acid series products increased 10.70% year-on-year in 2023, inventory increased by 33.23% compared to the previous year, and revenue decreased by 8.99% year-on-year. At the same time, sebacic acid products were still in the promotion period, and gross margin was low, resulting in a 2.83 PCT reduction in the overall gross margin of the long chain binary acid sector compared to the previous year; bio-based polyamide series products are in the commercial promotion stage. The unit cost is high. The gross margin of the sector decreased by 10.65PCT compared to the previous year, production volume and sales compared to the previous year. There was a decrease in the previous year. In addition, the company was affected by the international market environment, and overseas revenue fell 35.21% year on year, affecting performance.

2024Q1 performance increased significantly, mainly due to a recovery in downstream demand. The sales volume and sales revenue of the company's main product, long-chain dibasic acid, rose sharply compared to the same period last year; in addition, the company made every effort to expand the sebacic acid market and increase customer share, and the company's net profit to mother and net profit after deducting non-return to mother increased.

Establish in-depth cooperation with the China Merchants Bureau at the shareholder level to help the new progress in the release of bio-based polyamides. During the reporting period, the company's fixed increase was accepted by the Shanghai Stock Exchange, making every effort to promote research and development related to downstream applications of bio-based materials, and opening up the bio-based polyamide market with the assistance of the China Merchants Bureau. On January 31, 2024, the company issued a prospectus for issuing A shares to specific targets (declaration draft). After issuing the new shares, China Merchants Group will indirectly become a shareholder of the listed company to deepen strategic cooperation with the company. On December 1, 2023, the China Merchants Bureau invested 3 billion yuan to establish a wholly-owned subsidiary “China Merchants Innovation Technology Company” around the goal of “accelerating scientific and technological innovation and cultivating emerging industries”. The business project is the manufacture, R&D, sales of bio-based materials and the development and promotion of other new materials. The “1-8-20” cooperation agreement signed between Kaisai Biotech and China Merchants in June 2023 will also establish an increase in the company's performance. Furthermore, on January 16, 2024, the company signed an agreement with Korea's 3P.COM to establish a joint venture to cooperate in developing applications of bio-based polyamide composites, including hydrogen storage and transportation, urban air traffic, and wind power blades.

Use technological innovation to maintain industry competitiveness and accelerate the development of large-scale biomaterials application scenarios. Companies formulate development strategies around biomaterials, which are in line with future trends in a green, low-carbon, and sustainable industry. The market share of Kaisai biological long chain binary acid products is stable. As demand recovers, it will further support the company's performance. During the reporting period, the Bio-based Polyamide Engineering Technology Research Center and Kaisai (Wusu) Biotechnology Co., Ltd. completed projects with an annual output of 30,000 tons of long chain dibasic acid and 20,000 tons of long chain polyamide; the gradual release of biological sebacic acid production capacity contributed to the increase. According to iFind data, the average export volume of sebacic acid was 5050.95 tons in January, an increase of 66.71% over the previous month. The improvement in overseas market demand is conducive to the company's further biotechnology release; The renewable carbon content of pentanediamine is 100%. In response to carbon emission reduction requirements, the company will continue to optimize the strains and production processes of existing production lines to reduce costs and increase efficiency.

The implementation of cooperation with China Merchants will promote downstream application development of bio-based polyamide series products, accelerate the process and production capacity expansion of bio-based materials to replace petrochemical products, and support the company's future performance. At present, the company's bio-based polyamide products have developed a large number of customers in the fields of engineering plastics, spinning, transportation logistics, building materials, new energy, etc., and are expected to achieve “thermoplastic instead of thermoplastic, plastic instead of aluminum, and plastic for steel” in large scenarios in transportation logistics, new energy equipment, construction, etc. The company's 500,000 tons of bio-based pentylene diamine and 900,000 tons of bio-based polyamide projects under construction will be completed by the end of 2024 and put into production in batches. Among them, a demonstration line with an annual output of 5,000 tons of high-temperature nylon was completed by the end of 2023 for downstream composite material development. Resins are available.

Investment advice

The company's net profit for 2024-20256 is estimated to be 6.45 billion yuan, 9.35 billion yuan, and 1,254 billion yuan, respectively (the value before 2024-2025 was 7.54 billion yuan and 1,100 billion yuan), with year-on-year growth rates of 75.9%, 45.1%, and 34.0%. The corresponding PE is 46, 32, and 24 times, respectively. Maintain a “buy” rating.

Risk warning

(1) The risk of macroeconomic and industrial policy fluctuations;

(2) The risk of new project construction progress, product production progress and sales uncertainty; (3) the risk of changes in import and export policies such as tariffs and the international trade environment; (4) the risk of exchange rate fluctuations;