Key points of investment:

The company released its 2023 annual report: During the reporting period, the company achieved revenue of 7.852 billion yuan (YoY -13%), net profit attributable to mother of 100 million yuan (YoY -23%), and net profit of non-return to mother of 811 million yuan (YoY -16%). Among them, 23Q4 achieved revenue of 1,579 million yuan (YoY -41%, QoQ -20%), net profit attributable to mother of 213 million yuan (YoY -48%, QoQ +16%), net profit after deducting non-return net profit of 134 million yuan (YoY -37%, QoQ -25%), and gross sales margin of 33.06% in a single quarter, with year-on-month changes of +12.84pct and +7.00pct, respectively. In terms of expenses, 23Q4 sales and management expenses increased by 0.22 million yuan and 94 million yuan month-on-month, and R&D expenses increased by 47 million yuan month-on-month. In addition, 23Q4 asset disposal proceeds amounted to RMB 46 million, asset impairment losses amounted to RMB 47 million, and other proceeds amounted to RMB 180 million. In 2023, the company plans to distribute a cash dividend of 3.46 yuan (tax included) to all shareholders for every 10 shares, with a dividend ratio of 35.05%.

The company released its 2024 quarterly report: During the reporting period, the company achieved revenue of 1,613 billion yuan (YoY -22%, QoQ +2%), net profit attributable to mother of 137 million yuan (YoY -40%, QoQ -36%), and net profit after deducting non-attributable net profit of 136 million yuan (YoY -40%, QoQ +2%), falling short of expectations in a single quarter. 24Q1's gross sales margin was 26.77%, with year-on-month changes of +3.49pct and -6.29pct, net profit margin of 8.50%, and year-on-month changes of -2.56pct and +5.00pct, respectively. In terms of expenses, the absolute value of the company's expenses did not change much year over year, but due to the decline in revenue, sales, management, finance, and R&D expenses increased 4.35 pcts year over year to 17.58%. In addition, the company accrued credit impairment losses of $20 million.

The profitability of the high-end manufacturing chemical materials sector increased in 2023, but it is still difficult to make up for the performance pressure brought about by the sharp drop in the price of fluorine materials products. According to the company's 2023 annual report data, the company's high-end manufacturing chemical materials revenue was 3,093 billion yuan (YoY -4%), gross profit margin 40.49% (YoY+5.31pct); high-end fluorine materials revenue 1.61 billion yuan (YoY -20%), gross profit margin 14.31% (YoY -7.36pct); electronic chemicals revenue 665 million yuan (YoY -6%), gross profit margin 23.48% (YoY +11%); engineering and technical services revenue of 1,794 million yuan (YoY +11%), Gross profit margin 18.60% (YOY+0.38pct) By product, polytetrafluoroethylene resin sold 27,800 tons (YoY -2%), revenue 982 million yuan (YoY -15%), average price 35,300 yuan/ton (YoY -13%); fluorine rubber sales volume was 1,739 tons (YoY +9%), revenue was 163 million yuan (YoY -39%), average price 93,900 yuan/ton (YoY -44%); fluorinated gas sales volume 5,691 tons (YoY +6%), with an average price of 102,200 million yuan (YoY +0%) y -5%); rubber Sales volume of sealing products: 12.91 million pieces (YoY +23%), revenue of 250 million yuan (YoY +15%), average price of 193,600 yuan/10,000 pieces (YoY -6%); sales volume of specialty tires: 37,300 thousand (YoY +17%), average price: 0.55 million yuan/bar (YoY -5%); sales of new polyurethane materials: 16,700 tons (YoY +40%), average price of 20.9 million yuan/ton (YoY) -ton; Special coatings sold 1.36 tons (YoY +4%), revenue 555 million yuan (YoY +13%), average price 40,700 yuan/ton (YoY +9%).

The gross margin of 24Q1 products gradually recovered, but the profit side was still under pressure due to costs. Since 2024, some of the company's products have remained at a low point in the market. According to the company's quarterly report data, the average sales price of polytetrafluoroethylene resin was 33,900 yuan/ton (YoY -8%, QoQ -2%), the average sales price of fluorine rubber was 84,500 yuan/ton (YoY -26%, QoQ -1%), and the average sales price of fluorinated gas was 10,000 yuan (YoY -18%, QoQ -7%). However, judging from the sector situation, the gross margins of the two major sectors of high-end manufacturing chemical materials and electronic chemicals increased by 10.44 pct and 4.02 pct, respectively, over the same period last year. Looking at the quarter-on-month period, the gross margin of all major business segments increased to varying degrees. High-end manufacturing chemical materials increased 2.49 pct month-on-month, high-end fluorine materials increased 7.56 pct month-on-month, and electronic chemicals increased 4.34 ppct month-on-month, showing a positive trend. In terms of key projects, the 26,000 tons/year high-performance organic fluorine material project, the 46,600 tons/year special new material project and related raw material industrialization capacity building project are undergoing civil construction, the 100,000 units/year civil aviation tire project is undergoing trial production, the Southwest Electronics Special Gas Project is carrying out design work, and the clean energy catalytic materials industrialization base project has been completed and put into operation. As of the first quarter report of 2024, the company's projects under construction amounted to 2.119 billion yuan, an increase of 1,094 billion yuan over the same period last year.

The acquisition of Sinochem Blue Sky accelerates the integration of the fluorine chemical industry chain, and the refrigerant business is expected to bring great performance flexibility. The company plans to purchase 100% of the total shares of Sinochem Blue Sky held by Sinochem and Sinochem Asset by issuing shares. At the same time, it plans to raise no more than 4.5 billion yuan in supporting capital from the non-public offering of shares from no more than 35 eligible specific investors, including China Foreign Economic and Trade Trust Co., Ltd., and Sinochem Capital Innovation Investment Co., Ltd.

Sinochem Blue Sky has been deeply involved in comprehensive research on fluorine chemicals for more than 70 years. Currently, it is mainly engaged in R&D, production and sales of fluorine-lithium battery materials, fluorocarbon chemicals, fluoropolymers and fluorine fine chemicals. The products cover almost the entire fluorine chemical industry chain. With the integration of China's internal resources, a strong partnership will further improve the layout of Haohua's fluorine chemical industry. According to the company announcement, in 2023, Zhonghua Blue Sky achieved revenue of 6.677 billion yuan (YoY -29%), of which fluorocarbon chemicals revenue accounted for 45.84%, net profit to mother of 123 million yuan (YoY -85%), and net profit after deducting non-return to mother of 182 million yuan (YoY -77%).

Looking back, HFCs have begun to implement a quota system, and prices have continued to rise since 2024. As of April 30, 2024, according to Baichuan Yingfu data, the low-end prices of mainstream third-generation refrigerants R32, R125, and R134a in Zhejiang have risen by 14,250, 17,500, and 4,500 yuan/ton respectively from the beginning of the year to 31,000, 4,500, and 31,500 yuan/ton. It is expected that Sinochem Blue Sky's fluorocarbon chemicals business will benefit greatly.

Investment analysis opinion: The company's product market is still at a low point. The 24Q1 performance is lower than expected. The company's 2024-2025 net profit forecast was lowered to 10.08 and 12.05 (the original value was 11.57 billion yuan and 1,477 billion yuan, note: Sinochem Blue Sky was not taken into account), and the net profit forecast for 2026 was 1,464 billion yuan (note: Sinochem Blue Sky is also not taken into account). The current market value corresponds to PE 28, 24, and 19X, respectively. According to Wind's consensus expectations, it is comparable to CSSC's 2024 PE 37X, maintaining the “Overweight” rating.

Risk warning: 1) The release of new production capacity fell short of expectations; 2) Product prices fell sharply; 3) The price of raw materials rose sharply; 4) The company received an inquiry letter from the Shanghai Stock Exchange to issue shares to purchase assets and raise supporting capital.