Incidents:

On April 26, 2024, Shandong Heda released its 2023 annual report: achieved operating income of 1.56 billion yuan in 2023, down 9.7% year on year; realized net profit of 220 million yuan, down 37.8% year on year; gross sales margin of 29.3%, down 4.9 pcts year on year, net sales margin 14.2%, down 6.4 pcts year on year; net cash flow from operating activities was 180 million yuan.

In the Q4 quarter of 2023, the company achieved operating income of 380 million yuan, -3.5% year-on-year, and -11.8%; realized net profit to mother of -0.09 million yuan, -119.4% year-on-year, or -112.8% month-on-month; and net cash flow from operating activities was 82 million yuan. The gross sales margin was 24.2%, -5.3 pcts year-on-year, and -6.2 pcts month-on-month. Net sales margin was -2.5%, -14.7 pcts year-on-year, and 19.4 pcts month-on-month.

In the Q1 quarter of 2024, the company achieved operating income of 435 million yuan, +16.1% year-on-year, and +15.3% month-on-month; realized net profit of 54 million yuan; and net cash flow from operating activities of 54 million yuan. The gross sales margin was 25.1%, -5.9 pcts year over year, and +0.9 pcts month-on-month. Net sales margin was 12.3%, -7.1 pcts year over year, and +14.8 pcts month-on-month.

Key points of investment:

The 2023 results were dragged down by depreciation and amortization of the new base. 2024Q1 performance improved month-on-month in 2023, and the company achieved net profit of 220 million yuan to mother, a year-on-year decrease of 37.8%. Mainly due to the downturn in the downstream real estate market in 2023, inventory removal from overseas customers, and increased industry competition, product prices declined. Combined with the early stages of Gaoqing base products, the capacity utilization rate was relatively low, and depreciation and amortization pressure increased. By product sector, cellulose ether achieved operating revenue of 1.13 billion yuan, -2.5% year on year, sales volume 40,400 tons, with sales price of 28,000 yuan/ton, -16% year over year, gross margin of 25.5%, down 5.1 pcts year on year; vegetable capsules achieved operating revenue of 250 million yuan, -10.9% year on year, sales volume of 11 billion capsules, -8% year on year, and sales price of 2.23 million yuan/billion capsules, -3% year on year. At the end of 2023, the company's construction project was 170 million yuan, a decrease of 1.24 billion yuan compared to the beginning of 2023. It was mainly affected by the transformation of the 410,000 tons/year (phase I) cellulose ether project and environmental protection upgrading project at the Gaoqing base. In terms of the cost ratio for the period, the sales/management/finance expense ratio in 2023 was 1.9%/7.1%/0.5%, respectively, up 0.5 pct/0.1 pct/1.5 pct from the previous year.

2024Q1 achieved net profit of 54 million yuan, a year-on-year decrease of 0.19 million yuan, a year-on-year increase of 63 million yuan, and realized gross profit of 109 million yuan, a year-on-year decrease of 0.07 billion yuan, and an increase of 17 million yuan over the previous year. In addition, the company's management expenses increased by 0.04 billion yuan year on year, decreased by 25 million yuan; net investment income decreased by 01 million yuan year on year, up 0.18 million yuan from month to month; asset impairment losses increased by 01 million yuan year on year, a decrease of 222 million yuan from month to month.

Continue to improve the product portfolio and wait for the inflection point of industry demand

By the end of 2023, the company had a production capacity of 69,000 tons of cellulose ether, with a production capacity of 50,000 tons under construction, with no planned production capacity of 11,000 tons; vegetable capsules had a production capacity of 35 billion capsules, a capacity utilization rate of 39%, and a production capacity of 15 billion tablets under construction. In the context of mismatch between supply and demand in the industry and overcapacity, the company actively adjusts the product and market structure. In 2023, high-end pharmaceutical coating product technology was successful, and second-generation pure capsules were successfully registered. At the same time, the company accounted for more than 50% of export revenue in 2022 to 2023. Furthermore, the company acquired Zhongheda to expand hydroxyethyl cellulose (HEC) products and enrich the product matrix.

The company has outstanding advantages in integrating cellulose ether and vegetable capsules. Waiting for the inflection point of industry demand, the company's product capacity utilization rate is expected to increase.

Profit forecast and investment rating Due to the consolidation of the company's Gaoqing project and increased depreciation and amortization costs, we adjusted the company's performance forecast. We expect the 2024/2025/2026 operating income to be 21/25/2.8 billion yuan, respectively, and the net profit to mother will be 2.95/4.26/515 million yuan, corresponding to PE 17/12/10 times. The company's future growth path is clear: the Gaoqing project is gradually implemented and plant capsule production capacity is gradually released, so we maintain the “buy” rating.

Risks indicate the risk of upstream raw material price fluctuations; the risk of falling product prices; demand in the downstream terminal real estate, pharmaceutical and food industries falling short of expectations; the progress of capacity construction and commissioning of new construction projects is lower than expected; and inflation rates in Europe and the US remain high.