Incident 1: On April 26, 2024, Akoli released its 2023 annual report. The company's revenue in 2023 was $537 million, down 24.73% year on year; net profit to mother was 0.24 million yuan, down 80.10% year on year; net profit after deducting non-net profit was 0.19 million yuan, down 83.54% year on year. The corresponding company's 4Q23 revenue was 123 million yuan, down 8.21% from the previous month; net profit to mother was 03 billion yuan, down 51.98% from the previous month.

Incident 2: On April 26, 2024, Akoli released its 2024 quarterly report. The company's 1Q24 revenue was 103 million yuan, down 28.13% year on year and 16.32% month on month; net profit to mother was 0.1 billion yuan, down 81.01% year on year and 52.56% month on month.

Comment: Insufficient demand for downstream wind power combined with a large increase in production capacity. Polyether amine prices fell, and the company's annual performance was under pressure. According to the company's 2023 annual report, the company's revenue in the aliphatic amine/optical materials sector in 2023 was 3.52 billion yuan, YoY was -28.38/ -16.70%, respectively, and gross margins were 9.30/ 24.92%, respectively, a year-on-year change of -19.33/ -8.85pcts. In 2023, the company's sales volume in the fatty amine segment was 20,700 tons, up 15.21% year on year; sales volume in the optical materials sector was 5347.28 tons, up 25.69% year on year. The mismatch between supply and demand has led to a short-term decline in the price of polyetheramine products. According to the 2023 major operating data announcement, the average price of polyether amine in 2023 was 17017.31 yuan/ton, a year-on-year decrease of 37.83%. The company's sales expenses decreased by 21.97% year on year, the sales expense ratio was 1.53%, up 0.06 pcts year on year; financial expenses increased 18.14% year on year, financial expenses rate was -1.55%, down 0.13 pcts year on year; management expenses decreased by 18.86% year on year, management expenses rate was 6.95%, up 0.50 pcts year on year; R&D expenses decreased 37.70% year on year, and R&D expenses decreased by 3.37% year on year, down 0.70 pcts year on year.

1Q24 polyether amine prices are still in a downward range, dragging down the company's performance in the short term. According to the company's business data announcement for the first quarter of 2024, the average sales price of polyether amine in 1Q24 was 16106.17 yuan/ton, down 8.29% year on year. The polyether amine industry was sluggish in the short term, product prices and profits gradually bottomed out, and the company's performance was under pressure in the short term.

The net cash flow from the company's operating activities and investment activities fluctuates greatly. Net cash flow from operating activities in 2023 was $43 million, down 70.26% year on year; net cash flow from investment activities was $94 million, up 190.24% year on year; net cash flow from financing activities was -029 million yuan, up 7.29% year on year; and the balance of cash and equivalent at the end of the period was $355 million, up 44.41% year on year. Accounts receivable fell 13.30% year on year, and the accounts receivable turnover decreased from 8.74 times to 8.60 times; inventory fell 14.20% year over year, and inventory turnover decreased, from 9.83 times to 9.21 times.

Demand for polyether amines has been growing steadily over the long term, and production capacity release expectations are putting pressure on product prices. As the total installed capacity of wind power in China continues to expand, the demand for polyether amines is growing steadily. According to Sullivan statistics, China's polyether amine market has grown from 42,000 tons in 2016 to 101,400 tons in 2020, with a compound growth rate of 24.50%. It is predicted that China's polyether amine sales scale will reach 148,000 tons in 2025, with a compound growth rate of 7.86% in 2020-2025; from the supply side, domestic companies' polyether amine production capacity is also showing a continuous upward trend. According to the company's 2023 annual report, the total foreign production capacity has reached 220,000 tons by 2023. According to incomplete statistics, domestic enterprises plan to add about 200,000 tons of production capacity by 2025. The easing of the future supply pattern has put some pressure on the price of polyether amine products. We believe that although the expected pressure for new production capacity is high, the current low product prices and profits will slow down the construction progress of related production capacity to a certain extent, and there is uncertainty about the commissioning of new production capacity in the future.

COC/COP materials have excellent performance, the company's products have been domesticated and replaced, and the kiloton production line is about to be released.

COC/COP has excellent characteristics such as high thermal deformation temperature, high transparency, low birefringence, low dielectric loss, and low dielectric constant, and can be used in the manufacture of optical components such as various lenses, display films, and 5G antenna receivers; COC/COP has characteristics such as high shrinkage, low shrinkage, low density, and high gas barrier properties, and can be used to produce packaging materials in high-end applications such as food, cosmetics, and health products; COC/COP/COP also has excellent properties such as high water vapor barrier, good biocompatibility, heat resistance and chemical corrosion resistance, can be used to make microtiter plates and blood Medical devices such as reservoirs, test tubes, pre-filled needles, and suction tubes. Due to high barriers to commercialization of COC/COP, the world's main production capacity is currently in the hands of Japanese companies, and China's COC/COP is dependent on imports. According to Akri's 2023 annual report, Ryon's production capacity is 47,600 tons, polyplastics production capacity is 35,000 tons, Mitsui Chemicals has a production capacity of 6,400 tons, and Japan's synthetic rubber production capacity is 5,000 tons. The company's COC/COP products are mainly used in the optical field and medical field. Key indicators such as light transmittance, refractive index and vitrification temperature have reached the level of imported products. The company has carried out preliminary work such as product certification and testing with a number of well-known enterprises in the downstream application field and signed intended cooperation agreements. The downstream products cover fields such as mobile phone optical lenses, optical components, and high-end medical packaging materials (Xilin bottles).

According to Akri's 2023 annual report, the company is building a cyclic olefin polymer (COC) kiloton production line on the basis of a 5,000 ton optical-grade cyclic olefin raw material production line. It will be completed and put into operation in 2024, and the product volume is imminent. Looking ahead, in October 2022, the company invested 1.05 billion yuan to build a project with an annual output of 20,000 tons of polyether amine and 30,000 tons of optical materials (COC/COP) in the Qianjiang Jianghan Salt Chemical Industrial Park, and has completed all underground construction by the end of 2023. The production capacity of the first phase of the optical materials project is expected to be 10,000 tons, including 70,000 tons of cyclic olefin monomers and 30,000 tons of cyclic olefin polymers. We are optimistic about the upcoming domestic replacement volume of the company's COC products and the gradual commissioning of future production capacity, which is expected to contribute to the company's performance.

Investment advice: We expect Akoli's revenue for 2024-2026 to be 6.21/997/1,194 million yuan, up 15.75%/60.54%/19.69% year on year, net profit to mother of 0.53/1.40/ 192 million yuan respectively, up 123.65%/163.54%/37.54% year on year, corresponding EPS 0.60/1.59/2.19 yuan respectively.

Combined with the company's closing price on May 21, the corresponding PE was 73/28/20 times, respectively. We are based on the following two aspects: 1) We believe that although the pressure to build new production capacity is high, the current low product prices and profits will slow down the construction progress of related production capacity to a certain extent, and there is uncertainty about the commissioning of new production capacity in the future. 2) We are optimistic about the imminent replacement volume of the company's COC products and the gradual commissioning of future production capacity. It is expected that it will contribute to the increase in the company's performance and maintain a “buy” rating.

Risk warning: risk of price fluctuations of upstream raw materials, risk of increasing industry competition, risk of product technology innovation, risk of downstream demand falling short of expectations