Incident 1: The company released its 2023 annual report. In 2023, the company achieved revenue of 7.852 billion yuan, a year-on-year decrease of 13.40%; realized net profit of 100 million yuan, a year-on-year decrease of 22.76%; and realized net profit of 811 million yuan after deduction, a year-on-year decrease of 15.86%. With 2023Q4, the company achieved revenue of 1,579 billion yuan in a single quarter, a year-on-year decrease of 39.27% and a year-on-month decrease of 19.86%; realized net profit to mother of 213 million yuan, a year-on-year decrease of 47.81%, and a year-on-month increase of 15.97%.

Incident 2: The company released its 2024 quarterly report. With 2024Q1, the company achieved revenue of 1,613 billion yuan in a single quarter, a year-on-year decrease of 21.62% and a month-on-month increase of 2.17%; realized net profit of 137 million yuan, a year-on-year decrease of 39.87% and a decrease of 35.76% month-on-month; and realized net profit of 136 million yuan after deduction, a year-on-year decrease of 39.54% and an increase of 1.78% month-on-month.

Comment:

Product prices fell, putting pressure on the company's performance. Due to falling prices of fluorinated material products such as PTFE resin, fluorine rubber, fluorine gas, etc., the company's revenue declined year on year, putting pressure on performance. In '23, the revenue of the company's high-end manufacturing chemical materials, high-end fluorine materials, and electronic chemicals business was 30.9 billion yuan, 16.01 million yuan, and 660 million yuan respectively, a year-on-year decrease of 4.5%, 20.5%, and 5.8%, respectively. In terms of product prices, the average sales prices of the company's PTFE resin, fluorine rubber, and fluorine gas decreased by 13.4%, 44.4%, and 5.4%, respectively, year on year in '23. After entering 24Q1, the rate of decline in the company's product prices has slowed down, but there is still a certain degree of decline. Compared with the average price of 23H2, 24Q1's average sales price of PTFE resin, fluorine rubber, and fluorine gas decreased by 1.6%, 0.4%, and 8.6%, respectively. However, it is worth noting that although the prices of the company's products have been adversely affected, the overall gross margin of the company's main business increased by 2.2 pcts year on year in '23, and the company's overall gross sales margin increased by about 3.5 pct year on year through various measures such as cost reduction and efficiency. In terms of expenses, the company's sales period cost ratio increased 2.8 pcts year on year in '23, while the cost ratio for the 24Q1 sales period increased 4.4 pct year on year.

Promote production capacity construction in an orderly manner and consolidate the four major business strengths. In terms of high-end fluorine materials, the subsidiary Zhonghao Chenguang and its joint venture have production capacity of 30,000 tons/year fluororesin, 5,500 tons/year fluorine rubber, and 2,500 tons/year PVDF, and are fully equipped for intermediates such as fluorochloromethane. Meanwhile, the company's 26,000 tons/year high-performance organic fluorine material project is under construction. In terms of electronic chemicals, the company's new 4,600 tons/year electronic gas project has all been completed and put into operation, and the company's current fluorine-containing electronic gas production capacity ranks among the highest in China. The company's Southwest Electronics Special Gas Project is expected to start construction within 2024. In terms of high-end manufacturing chemical materials, the civil aircraft fireproof sealing rubber material independently developed by the company passed airworthiness certification and entered the customer engineering material selection catalogue; completed the independent design and manufacture of domestic regional aircraft suspension seals, successfully passed airworthiness eyewitness tests and achieved installed application, and the product performance reached the international advanced level. In terms of carbon emission reduction business, the company signed a project contract of 903 million yuan in 2023. At the same time, the company localized large-scale methanol catalysts and achieved independent research and development in three domestic coal-to-methanol plants of 1.8 million tons/year.

It is proposed to acquire 100% of Sinochem Blue Sky's shares and raise supporting capital to improve the layout of the fluorine chemical industry chain. The company plans to purchase 52.81% and 47.19% of the shares in Sinochem Blue Sky from Sinochem Group and Sinochem Asset, respectively. The transaction price is about 7.244 billion yuan, the issued share price is 37.07 yuan/share, and the corresponding number of shares issued is about 195 million shares. After the transaction is completed, Sinochem Blue Sky will become a wholly-owned subsidiary of the listed company. In addition, the company plans to raise 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., and the total amount raised will not exceed 4.5 billion yuan. The supporting capital raised will be used for construction, supplementary working capital, or debt repayment for projects such as the “20,000 tons/year PVDF project” and the “200,000 tons/year lithium-ion battery electrolyte project (Phase I)”. For listed companies, the acquisition of Sinochem Blue Sky will enable listed companies to have business lines for refrigerants and other related products, thereby improving the layout of the listed company's existing fluorine chemical industry chain, enhancing the overall synergy of listed companies, and enhancing the competitiveness of listed companies in the fluorine chemical industry.

Profit forecast, valuation and ratings: Due to falling prices of products such as PTFE resins, fluorine rubber, and fluorinated gases, the company's performance in '23 and 24Q1 was slightly lower than previously anticipated. In view of the decline in the prices of related products, we lowered the company's 24-25 profit forecast and added a 26-year profit forecast. The company's net profit for 24-26 is estimated to be 10.39 (down 23.8%)/11.74 (23.4% decrease)/1,299 billion yuan, respectively. The company continues to promote the implementation of existing key production capacity projects, which will further consolidate the comprehensive strength of the company's existing business. At the same time, after the construction of the acquisition and supporting capital raising project for Sinochem Blue Sky is completed, the company's industrial chain layout in the field of fluorine chemicals will continue to be improved, greatly enhancing the company's competitiveness in the field of fluorine chemicals and maintaining a “buy” rating.

Risk warning: Downstream demand falls short of expectations, fluctuating product and raw material prices, capacity construction risks, asset restructuring and implementation risks.