occurrences

On April 29, 2024, Ruilian New Materials released its 2023 annual report: in 2023, the company achieved operating income of 1,208 billion yuan, down 18.39% year on year; realized net profit of 134 million yuan, down 45.57% year on year; weighted average return on net assets was 4.54%, a decrease of 3.99 percentage points year on year. The gross profit margin on sales was 35.18%, a year-on-year decrease of 3.54 percentage points; the net profit margin was 11.11%, a year-on-year decrease of 5.54 percentage points.

At the same time, the company released its 2024 quarterly report. In the first quarter of 2024, the company achieved operating income of 328 million yuan, up 19.77% year on year, up 18.81% month on month; realized net profit to mother of 0.34 million yuan, up 144.17% year on year, down 4.96% month on month; weighted average return on net assets was 1.17%, up 0.70 percentage points year on year and 0.06 percentage points month on month. The gross profit margin on sales was 36.20%, up 3.95 percentage points year on year and decreased 2.02 percentage points from month to month; net sales margin was 10.46%, up 5.33 percentage points year on year and down 2.62 percentage points from month to month.

reviews

Sales of display materials and pharmaceutical intermediates declined. The company's profit in 2023 was under short-term pressure. In 2023, the company achieved operating income of 1,208 billion yuan, a year-on-year decline of 18.39%, mainly due to the continued lukewarm demand for downstream terminal consumer electronics in the display materials industry, and realized net profit of 134 million yuan in 2023, a year-on-year decline of 45.57%. The decline was higher than the decline in revenue. The decline was mainly due to the weakening of the scale effect due to the decline in revenue and the decline in gross margin due to the increase in unit production costs. By sector, in 2023, Display Materials achieved revenue of 1,031 billion yuan, -17.48% year-on-year, sales volume of 204.32 tons, -20.11% year-on-year, gross margin reached 33.23%, a year-on-year decrease of 2.54 percentage points; pharmaceutical intermediates achieved revenue of 136 million yuan, -25.47% year-on-year, and sales reached 26.45 tons, -28.34% year-on-year, and gross margin reached 55.84%, a year-on-year decrease of 3.28 percentage points. In terms of period expenses, the company's sales/management (including R&D) /financial expenses ratio in 2023 was 2.28%/22.05%/-2.01%, respectively, +0.10/+3.06/-0.50pct, compared with +0.10/+3.06/-0.50pct, and various expenses were controlled well. In 2023, the net cash flow from the company's operating activities reached 449 million yuan, +132.06% year-on-year, mainly due to a sharp drop in cash from purchasing goods and receiving labor payments under the inventory digestion strategy.

The recovery in consumer electronics demand combined with cost reduction and efficiency. The 2024Q1 performance improved sharply year on year. The company achieved operating income of 328 million yuan in the first quarter of 2024, up 19.77% year on year, up 18.81% month on month; realized net profit to mother of 34 million yuan, up 144.17% year on year, and 4.96% month on month. The company's first-quarter performance improved sharply year on year, mainly affected by the recovery in demand for terminal consumer electronics. The company's revenue in the display materials sector, especially OLED display materials, increased sharply year on year. At the same time, the company continued to deepen cost reduction and efficiency, improve the level of refined management through process optimization, saving and exploration, and strengthening cost control, etc., to improve operating efficiency, reduce production costs, and greatly increase profitability. In 2024, the market recovery in the display industry has become an industry consensus. The profit stability of panel companies has increased, and the company, as an upstream material supplier, will also fully benefit.

OLED's competitive advantage continues to improve. The OLED materials produced by the pharmaceutical sector to build an “intermediate+API” integrated strategy are mainly OLED pre-sublimation materials. The customer base has basically achieved full coverage of the world's leading OLED terminal materials companies, and the pre-OLED materials produced by the company have achieved full coverage of major OLED terminal materials such as light-emitting layer materials and general-purpose layer materials. In the future, the company will continue to iterate on technology, and dig deeper into breakthroughs in deuterium generation technology; further increase the stickiness of major customers, explore the stock share of other customers, and ensure the leading position of materials in the industry before sublimation. The pharmaceutical business is an important long-term strategic development direction for the company. The company continues to optimize the resource allocation in this sector in terms of talent introduction, R&D investment, etc., and continuously enrich the product variety and structure. At the product pipeline level, as of the end of 2023, the company had 207 pharmaceutical pipelines, a net increase of 67 compared to the end of 2022. At the same time, in order to promote the company's “intermediate+API” integrated CMO/CDMO strategy, the company began construction of the Ruilian Pharmaceutical API project in 2021. Currently, the first phase of the API project has reached the intended state of use and is currently processing a marketing license application for the first API product. Currently, domestic registration inspection, drug registration site inspection, and GMP compliance inspection of the product have been completed, and it can be sold domestically after obtaining an approval notice for the chemical API marketing application. As the competitive advantage of the company's OLED materials business continues to improve and pharmaceutical business operations expand, the company will grow rapidly in the future.

Profit forecasting and valuation

The company's OLED competitive advantage continues to improve, and pharmaceuticals and intermediates continue to be developed, and the company will grow rapidly in the future. The company's net profit for 2024-2026 is estimated to be 219, 2.76, and 340 million yuan respectively, and EPS is 1.62, 2.05, and 2.52 yuan, respectively. The current price corresponds to PE of 22.25, 17.65, and 14.31, which is covered for the first time, giving it a “buy” rating.

Risk warning

The release of new production capacity falls short of expectations, consumer electronics demand falls short of expectations, the risk of raw material price fluctuations, and the risk that the promotion of new products falls short of expectations.