Description of the event

The company released its 2023 annual report: achieved revenue of about 830 million yuan, an increase of 1% year on year, attributed net profit of about 80 million yuan, a decrease of 5% year on year, and a decrease of 7% year on year after deducting non-net profit. The company released its 2024/1 quarterly report: achieved revenue of 250 million yuan, a year-on-year increase of 5%, attributed net profit of about 0.2 billion yuan, a year-on-year increase of 51%, and a year-on-year increase of 39% after deducting non-net profit.

Incident comments

Small-scale releases of titanium dioxide began. The company achieved revenue of 770 million yuan in 2023, an increase of 1% over the previous year, and revenue of titanium dioxide of 50 million yuan, an increase of 9% over the previous year. Last year, titanium dioxide was still in the process of optimizing product performance. By market, the company's foreign revenue in 2023 was 290 million yuan, accounting for about 35% of the main revenue, down 4% from the previous year, but the gross margin of foreign revenue was about 46%, which was 14.5 percentage points higher than that of the domestic market. By channel, the company's direct sales revenue in 2023 was about 280 million yuan, accounting for about 34% of the main revenue, up 16% year on year. The gross margin of the direct sales business reached 55.7%, up 3.5 percentage points year on year; the gross margin of the distribution business was about 27%, up 2.6 percentage points year on year.

This gross margin reflects the strong global competitiveness of the company's pearlescent materials. In addition to large customers adopting a direct sales model, the company also has more than 200 domestic and foreign distributors. End customers include world-renowned automotive paint manufacturers, internationally renowned cosmetics companies, and paint companies. The above channel advantages are conducive to customer development and large-scale release of the new product titanium dioxide.

Pearlescent materials showed strong performance, and net interest rates increased slightly. The company's gross margin in 2023 was 36.8%, an increase of 4.1 percentage points over the previous year. Among them, the gross margin of pearlescent materials was about 39.2%, up 4.8 percentage points from the previous year, mainly due to the combined effects of the growth in the high-end business of pearlescent products and the decline in raw material prices. The annual rate was about 24.9%, up 3.7 percentage points from the previous year. The final net interest rate for 2023 was about 10.1%, down 0.6 percentage points from the previous year. The gross margin of 2024Q1 was about 32.5%, up 4.6 percentage points from the previous year. The rate for the period was about 21.5%, up 2.9 percentage points from the previous year. Due to the increase in interest, the financial rate increased 1.8 percentage points year over year. The final net profit margin was about 8.0%, an increase of 2.4 percentage points over the previous year.

Years of investment will pay off. The hydrochloric acid extraction method is the world's first titanium dioxide preparation process independently developed by the company. First, the process equipment and supporting facilities have been in operation for a long time, and the extraction process conditions have met design requirements. Second, the multi-dimensional performance indicators of titanium dioxide and iron oxide products have gradually improved. The titanium dioxide currently produced by the company is mainly plastic grade, and there are also a small number of paint grade products, which have achieved good reviews in customer application evaluations and tests. Currently, the production and sales rate of titanium dioxide products is low, making cost dilution weak. The gross margin in 2023 is about 1%. At the same time, additional credit loans were added to supplement working capital and start production, and annual interest expenses increased by nearly 20 million yuan over the same period last year. In the end, the wholly-owned subsidiary, Zhengtai New Materials, as the main producer and seller of titanium dioxide, still lost 40.72 million yuan in 2023.

New development stage: From the production line climbing stage to the product release stage. The company's main business has changed in the past few years, and its products have been extended from pearlescent materials to titanium dioxide, which means entering the mainstream market from the inorganic pigment segment. The company's core competitiveness lies in the innovative use of hydrochloric acid extraction methods to produce titanium and iron oxides at low cost. This technology is also suitable for pearlescent materials and titanium dioxide. Reviewing its commissioning process, we see the company's persistence on the path to innovation: 1) The 200,000 tons/year titanium dioxide project began trial production in August 2019, which is equivalent to small-scale mass production of titanium dioxide; 2) The 100,000 tons/year titanium dioxide project began trial production in December 2020, and reached large-scale continuous production in 2023. The company's net profit for 2024-2025 is estimated to be 210 to 650 million yuan, corresponding to a valuation of 96 or 31 times, and pay attention to the pace of order release.

Risk warning

1. Downstream demand for related products has declined sharply;

2. Product performance and customer certification time is long.