Incident 1: On April 22, 2024, China Catalyst released its 2023 annual report. The company's revenue in 2023 was 550 million yuan, down 19.21% year on year; net profit to mother was 77 million yuan, down 49.34% year on year; deducted non-net profit was 54 million yuan, down 57.61% year on year. The corresponding company's 4Q23 revenue was 186 million yuan, up 45.79% month-on-month; net profit to mother was 34 million yuan, up 728.29% month-on-month.
Incident 2: On April 22, 2024, China Catalyst released its 2024 quarterly report. The company's 1Q24 revenue was 199 million yuan, up 61.19% year on year, up 7.22% month on month; net profit to mother was 35 million yuan, up 1610.19% year on year, up 4.26% month on month.
Comment: Poor downstream demand for the company's core products puts pressure on the company's performance in 2023. According to the company's 2023 annual report, the revenue of the company's special molecular sieve and catalyst series/non-molecular sieve catalyst series segments in 2023 was 439/081 million yuan, YoY was -31.26/ 280.39%, respectively, gross margin was 32.62%/15.93%, a year-on-year change of -6.61-1.20 pcts. In 2023, the sales volume of the company's special molecular sieve and catalyst series segment was 2848.24 tons, down 30.83% year on year; sales volume of non-molecular sieve catalyst segment was 393.00 tons, up 8.26% year on year. Sales of the company's special molecular sieves and catalyst products declined due to poor downstream demand, which had a certain impact on the company's revenue. The company's sales expenses decreased 19.30% year on year, and the sales expense ratio was 1.83% year on year; financial expenses decreased 19.92% year on year, financial expenses rate was -1.14%, down 0.37 pcts year on year; management expenses increased 14.05% year on year, and management expenses rate was 11.63%, up 3.39 pcts year on year; R&D expenses decreased 4.07% year on year, and R&D expenses were 8.64% year on year, up 1.36 pcts year on year.
Downstream demand rebounded, and 1Q24 company performance gradually recovered. According to the company's 2024 quarterly report, benefiting from a sharp increase in procurement volume from downstream customers, 1Q24 achieved high year-on-year revenue growth. The increase in product prices and the scale effect brought about by the increase in sales volume jointly promoted the company's profitability. 1Q24's gross sales margin was 37.61%, an increase of 5.97 pcts over the previous year.
The net cash flow from the company's various activities fluctuates greatly. Net cash flow from operating activities in 2023 was $107 million, up 100.31% year on year; net cash flow from investment activities was -553 million yuan, up 23.15% year on year; net cash flow from financing activities was -131 million yuan, down 108.87% year on year; and the balance of cash and equivalent at the end of the period was 269 million yuan, down 68.20% year on year. Accounts receivable decreased by 23.52% year on year, and the accounts receivable turnover decreased from 3.29 times to 2.10 times; inventory increased 7.07% year over year, and inventory turnover decreased, from 1.39 times to 1.10 times.
The company is deeply bound to downstream customers to achieve stable supply of core products. The global automotive exhaust purification catalyst market shows an oligopoly market pattern. The main manufacturers include Zhuangxin Wanfeng, BASF, Umicore, etc., which occupy a major share of the global market. The company has established a long-term and stable cooperative relationship with BASF. BASF's global mobile source denitrification molecular sieves are mainly supplied by the company. The company's products have been sold to the European, South African and North American markets, and the development space in the international market has been broadened. Benefiting from the implementation of China's six emission standards and stricter exhaust emission standards in other countries, the company expects the global mobile source denitrification molecular sieve market space to expand further. We are optimistic about the company's deep binding with leading companies in the automobile exhaust purification catalyst industry. The company's product market advantages are obvious, and the revenue scale is expected to increase further.
The company focuses on R&D investment and continuously optimizes the product matrix. The company continues to step up research and development. According to the company's 2023 annual report, the company's R&D expenses in 2023 were 47,534,900 yuan, and the R&D expenditure rate was 8.64%, an increase of 1.36 pcts over the previous year. The company and its wholly-owned subsidiaries have obtained a total of 221 authorized patents, including 166 invention patents in China, 3 PCT international patents, and 52 utility model patents. Using its own research and development capabilities, the company has actively deployed various environmentally friendly new material molecular sieves and catalyst products such as TRH special molecular sieves, VOCs purification catalysts, ethylene glycol synthesis catalysts, etc., metal catalyst products such as maleic anhydride catalysts, and fine chemicals such as mesocresol, high-purity silicon oxide, and high-purity alumina. We are optimistic about the company's new product layout in line with future market trends, and it is expected that the optimization of the company's product structure will enhance its core competitiveness.
Some of the company's projects under construction are about to be put into operation, and production capacity is expected to be gradually released. According to the company's 2023 annual report and some project extension announcements, after the company's new environmentally friendly materials and intermediates projects (3,300 tons of special molecular sieves and catalysts, 3,200 tons of non-molecular sieve catalysts, 10,000 tons of fine chemicals) were postponed due to expansion, the company's estimated completion time is February 2026. According to the company's 2023 annual report and investor question and answer platform information, the industrialization project for special molecular sieves, environmentally friendly catalysts, and automobile exhaust purification catalysts (3,000 tons of special molecular sieves, 1,000 tons of environmentally friendly catalysts, automobile exhaust purification catalysts) has reached trial production conditions, and the company expects sales to be formed in 2024. We are optimistic about the gradual completion of the company's projects under construction, which is expected to contribute to the company's performance.
Investment advice: We expect China Catalyst's 2024-2026 revenue to be 813/10.29/1,239 million yuan respectively, up 47.78%/26.58%/20.44% year on year, net profit to mother of 1.54/2.01/248 million yuan, up 99.67%/30.87%/23.57% year on year, corresponding EPS of 0.87/1.14/1.41 yuan respectively. Combined with the company's closing price on May 21, the corresponding PE was 25/19/15 times, respectively. We are based on the following three aspects: 1) We are optimistic about the company's deep binding with leading companies in the automotive exhaust purification catalyst industry. The company's product market advantage is obvious, and the revenue scale is expected to increase further. 2) We are optimistic about the company's new product layout in line with future market trends. It is expected that the optimization of the company's product structure will enhance its core competitiveness.
3) We are optimistic about the gradual completion of the company's projects under construction. It is expected that it will contribute to the company's performance and maintain a “buy” rating.
Risk warning: risk of exchange rate fluctuations, risk of industry market compression, risk of changes in downstream market demand, environmental protection risk, risk of concentrated downstream customers, risk of failure in new product development