Incident: On April 28, the company released its 2023 annual report and 2024 quarterly report. Throughout 2023, the company achieved total operating revenue of 1,208 billion yuan, -18.39% year on year; net profit to mother of 134 million yuan, -45.57% year on year; deducted non-net profit of 117 million yuan, -48.03% year on year; gross sales margin 35.18%, -3.54 pct year on year, net sales profit margin 11.11%, year on year -5.54 pct year on year. Among them, 2023Q4 achieved total operating income of 276 million yuan, -5.25% year on year; net profit to mother of 0.36 million yuan, -3.30% year on year; net profit after deducting non-net profit of 0.3 million yuan, +10.40% year on year; gross sales margin of 38.22%, -2.63 pct year on year; and net sales profit margin of 13.08% in a single quarter, +0.26pct year on year. 2024Q1 achieved total revenue of 328 million yuan in a single quarter, +19.77% year over year; net profit to mother of 0.34 million yuan, +144.17% year on year; net profit after deducting non-net profit of 32 million yuan, +199.57% year on year; single quarter gross sales margin of 36.20%, +3.95pct year on year; net sales profit margin of 10.46%, year on year +5.33 pct year on year.

The liquid crystal display sector is under pressure in 2023, and there are many products with potential release of OLED materials. Although demand for terminal consumer electronics recovered to a certain extent in 2023, there was no real upward driving force. In particular, in the first half of 2023, downstream panel manufacturers still strictly controlled production line operation rates to maintain the balance between supply and demand and reduce panel price fluctuations. On-demand production and dynamic production control became the norm in the industry, and upstream display material manufacturers were under pressure on the overall performance level due to relatively weak demand from downstream customers. In 2023, the company's display materials sector achieved revenue of 1,031 billion yuan, accounting for 85%, and was the company's main revenue source. Among them, the LCD sector declined sharply, the scope of “deuteration” of OLED products was further expanded, and the revenue of the company's OLED business segment was basically the same as that of the LCD sector. The number of small-volume orders in the OLED sector has increased dramatically, and the number of new product projects has further increased. On the one hand, it shows that downstream manufacturers are more cautious, and on the other hand, it shows that the company has more potential release products. We are optimistic about future OLED materials to supplement demand by category, and ease the short-term pressure on the overall display sector caused by poor downstream demand.

Profitability has improved in the first quarter, and the convertible bond project will further help the company's performance grow after construction.

Affected by the recovery in demand for terminal consumer electronics in the first quarter of 2024, the company's revenue in the display materials sector, especially OLED materials, increased sharply year on year, compounded by continuous cost control, and a significant increase in profitability. It is also further reflected that OLED materials play an increasingly important role as high-end display panel materials in the company's operations. It is expected that with economic recovery, downstream demand will be further transmitted to the company and drive the increase in performance. In addition, the issuance of the company's convertible bonds continues to advance. The fund-raising projects are OLED pre-sublimation materials and high-end fine chemicals industry base projects, with an estimated average annual revenue of 538 million yuan after completion.

Investment advice: Based on the company's recovery in downstream demand in the first quarter and the significant increase in performance, the downstream boom is a prerequisite for the company's performance to improve, and the company's share of the high-end materials OLED business has increased. We expect the company's net profit to the mother for 2024-2026 to be 1.96/2.272/357 million yuan, respectively, corresponding to the closing price of PE on April 30, 25/18/14 times, respectively, maintaining the “recommended” rating.

Risk warning: Downstream demand recovery falls short of expectations; the company's new product verification cycle is slowing down; investment and construction of convertible bond raising projects is progressing slowly.