E-cloth demand side: 24 years or positive growth. The 7628 electronic cloth is mainly used for mid-range and low-end PCB boards. The corresponding downstream application fields mainly include computers and peripherals, communication equipment, automotive electronics, consumer electronics, instrumentation, etc. Demand growth in most segments of 24Q1 achieved positive growth, and 24Q1 showed signs of acceleration in some fields. According to the forecasts of various industry organizations, downstream demand for computers, smartphones, automobiles, etc. will all maintain positive growth in 2024. According to Prismark's forecast, the 2024 PCB market output is expected to be $72.9 billion, up 5% year over year.

Electronic cloth supply-side shrinkage: no new additions, cold repair. Judging from the supply-side situation, the electronic yarn industry is expected to have no additional production capacity in 2024, and some production lines have been cold repaired and discontinued at the beginning of the year (Taishan glass fiber production line with an annual output of 50,000 tons of electronic yarn was discontinued in January 2024, and the electronic yarn production line with an annual output of 30,000 tons of glass fiber in Sichuan was cold repaired and discontinued in March 2024), judging that the electronic cloth supply side may show a trend of shrinking production capacity in 2024. Based on previous analysis, downstream PCB demand may maintain positive single-digit growth in 2024. It is determined that the supply and demand pattern of the electronic yarn and electronic cloth industry will tend to be smaller than demand in 2024, and prices are expected to continue to rise.

Electronic faucets, price increases drive profit flexibility. The pattern of the e-yarn e-cloth industry may tighten in 2024, and the momentum for product price increases is strong; the profit level of the company's electronic cloth business is already at the bottom of the current cycle in 24Q1, and the increase in product prices may clearly drive the company's profit growth. As of May 10, 2024, the price of G75 e-yarn was 8800 yuan/ton. Referring to the top of the previous cycle, the price of e-yarn rose as high as 17,000 yuan/ton. We estimate that if the price of e-yarn rises to 10,000/12000/14,000/16,000 yuan/ton during this cycle, the corresponding increase in non-net profit due to annualized deductions in the electronic cloth business would be 4.0/10.7/17.4/2.40 billion yuan, respectively.

Investment advice: Optimistic about the price increase of electronic cloth to drive the profit elasticity of leading companies. Since March 2024, the prices of thick glass fiber yarn and electronic yarn have been raised for many rounds, and prices have rebounded from the bottom. Compared with thick yarn, we judge that the electronic cloth industry has a better pattern. In 2024, supply may continue to be less than demand, and there is a strong basis for price increases. As a leader in the electronic cloth industry, the company's profit share of the electronic cloth business fell back to a cyclical low in 24Q1, and the increase in electronic cloth prices may clearly drive the company's profit growth. We are optimistic that the supply and demand pattern of the electronic cloth industry is improving, and we are also optimistic that the company, as the largest and cost leader in electronic cloth, will benefit from the increase in electronic cloth prices.

According to the latest price trends of glass fiber thick yarn and electronic yarn, we adjusted the forecast for the company's thick yarn and electronic cloth business to deduct non-net profit in 2024. It is estimated that in 2024, the company's thick yarn and electronic yarn will achieve net profit deducted from 2.28 billion yuan and 410 million yuan respectively. We have raised the company's 2024-2026 net profit forecast to 3 billion yuan (up 14%), 4.4 billion yuan (13% increase), and 6.7 billion yuan (12% increase). The current price corresponds to the company's dynamic price-earnings ratio in 2024, maintaining a “buy” rating.

Risk warning: The growth rate of downstream demand falls short of expectations, the rate of investment of new production capacity for thick yarn exceeds expectations, risk of price increases of raw materials, and risk of exchange rate fluctuations.