Incidents:
Suotong Development released its 2023 annual report. The company achieved total revenue of 15.311 billion yuan, a year-on-year decrease of 21.08%, net profit to mother of 723 million yuan, and a year-on-year change from profit to loss, with a basic EPS-1.4 yuan.
Performance losses due to falling prices and accrued impairment
In 2023, the price of the company's main product, pre-baked anodes, continued to decline. The average monthly price index for pre-baked anodes in December fell 38.01% compared to the average monthly price in January. The price of petroleum coke, the company's main raw material, continued to decline. The average monthly price index for petroleum coke in December fell 48.06% from the average monthly price in January. As production costs lagged behind changes in raw materials and product prices, the company's gross margin of pre-baked anodes fell sharply by 12.4 percentage points to 1.41%. The price drop caused the company to calculate an inventory impairment reserve of 74 million yuan. Since Xinyuan shares acquired by the company were included in the scope of the consolidated statements, the company's estimated goodwill depreciation of 746 million yuan.
Projects under construction progressed smoothly, and new production capacity continued to be deployed
In 2023, the company produced 2.9609 million tons of pre-baked anodes, an increase of 10.32% over the previous year; the operating capacity was 2.82 million tons. According to the company's production guidelines, pre-baked anode production will increase to 3.3 million tons in 2024, and operating capacity will increase to 3.46 million tons. The company's main projects under construction are progressing smoothly. The Shandong Innovation Phase II project, the new 40,000 ton graphitization project in Xinyuan, Inner Mongolia, the first phase of the Jiayuguan Shengyuan graphitization capacity of 25,000 tons has been completed and commissioned, and the 300,000 ton aluminum carbon materials project in Longxi Suotong are progressing smoothly. In March 2024, a joint venture between the company and Geely Baiguang Group to build a pre-baked anode project with an annual output of 600,000 tons is also underway.
Demand for anodes picked up, and product prices began to rise
In the first quarter of 2024, China's electrolytic aluminum production was 10.694 million tons, an increase of 6.8% over the previous year. With the arrival of the abundant water season in Yunnan in the second quarter, the production of electrolytic aluminum in Yunnan is expected to recover, which in turn will drive a recovery in demand for pre-baked anodes. In May 2024, the price of pre-baked anodes was raised by 60 yuan, the first increase since November 2022.
As downstream demand picks up and product prices rise, the company's profitability is expected to recover.
Profit forecasting and investment advice
We expect the company's revenue for 2024-2026 to be 1,56.45/17.98/20.074 billion yuan, respectively, up 2.18%/14.78%/12.9% year on year; net profit to mother will be 3.68/4.9/527 million yuan, respectively, up -/ 33.25%/7.57% year on year; EPS 0.68/0.91/0.97 yuan respectively. We gave the company 25 times PE in 2024, with a target price of 17 yuan, maintaining a “buy” rating.
Risk warning: risk of product price fluctuations; sharp drop in raw material prices; production falls short of expectations.