Incident 1: On April 29, 2024, Taihe New Materials released its 2023 annual report. The company's revenue in 2023 was $3,925 million, up 4.67% year on year; net profit to mother was 333 million yuan, down 23.59% year on year; net profit after deducting non-net profit was 235 million yuan, down 25.79% year on year. The corresponding company's 4Q23 revenue was 1,015 million yuan, up 4.8% from the previous month; net profit to mother was 55 million yuan, down 13.97% from the previous month.
Incident 2: On April 29, 2024, Taihe New Materials released its report for the first quarter of 2024. The company's revenue for the first quarter of 2024 was 966 million yuan, down 4.55% year on year and 4.83% month on month; net profit to mother was 25 million yuan, down 81.43% year on year and 53.86% month on month.
Comment: The low price of spandex is dragging down the company's profit level. According to the company's 2023 annual report, the revenue of the spandex sector/ aramid sector in 2023 was 1,489/2.406 billion yuan, YoY was -6.96/ +12.64% respectively; gross margins were -3.00/ 40.82%, respectively, a year-on-year change of -3.16/+0.36pcts.
The increase in the company's revenue is related to the increase in product sales. In 2023, the company's sales volume in the spandex segment was 51,600 tons, up 28.57% year on year; sales volume in the aramid sector was 17,200 tons, up 21.32% year on year. The decline in the company's profit level is mainly related to the decline in the price of spandex, and the price of spandex products is at the bottom. According to ifind data, the average price index for spandex 20D in 2023 was 37,391 yuan/ton, down 32.05% year on year; the average price index for spandex 40D was 32,481 yuan/ton, down 23.53% year on year. In 2023, the company's sales expenses increased 53.30% year on year, and the sales expense ratio was 2.88%, up 0.91 pcts year on year; financial expenses decreased by 138.20% year on year, financial expenses rate was -0.13%, down 0.50 pcts year on year; management expenses increased by 31.33% year on year, and management expense ratio was 7.00%, up 1.42 pcts year on year; R&D expenses increased 14.35% year on year, and R&D expenses were 5.08% year on year, up 0.43 pcts year on year.
The price of 1Q24 spandex is still in a downward channel, dragging down the company's 1Q24 company's performance. The spandex industry is fiercely competitive, and prices continue to fall. According to ifind data, the average price index for 1Q24 spandex 20D was 34,293 yuan/ton, down 16.21% year on year and 4.35% month on month; the average price index for spandex 40D was 29,793 yuan/ton, down 16.19% year on year and 5.13% month on month. The continued decline in spandex prices dragged down the company's performance in the short term.
There is some fluctuation in the cash flow generated by the company's various activities. The company's net cash flow from operating activities in 2023 was $356 million, down 24.55% year on year; net cash flow from investment activities was -1,846 billion yuan, down 4.69% year on year; net cash flow from financing activities was $2,483 million, up 14766.08% year on year; and the balance of cash and equivalent at the end of the period was 2,094 million yuan, up 91.71% year on year. Accounts receivable increased 116.97% year over year, and the accounts receivable turnover ratio declined markedly, from 25.60 to 14.83 times; inventory increased 68.65% year over year, and inventory turnover decreased, from 3.95 times to 3.08 times.
Spandex production is still expanding, and the situation where supply exceeds demand is likely to continue. According to statistics from the Chemical Fiber Information Network, the global production capacity of spandex was 1.63 million tons at the end of 2023, and China's spandex production capacity was about 1.23 million tons, an increase of 13% over the previous year, and the growth rate hit a new high since 2016. Although downstream demand for spandex has recovered, it is still in a state of oversupply. Product prices are still low, and most companies have lost money. In the short term, spandex is still at its peak of expansion. According to the company's 2023 annual report, domestic spandex production capacity is expected to increase by 300,000 tons in 2024. Relaxed supply will put a lot of pressure on prices, and the company expects product prices to fluctuate below the cost line. The company is the first spandex manufacturer in China, with a nominal production capacity of 100,000 tons/year, ranking in the top five in China, distributed in two bases in Yantai and Ningxia. We believe that the gradual bottoming of spandex prices may drive the clearance of underdeveloped production capacity, industry concentration is expected to gradually increase, and the company, as one of the leading companies in the industry, is expected to benefit in the medium to long term under this trend.
The price of aramid fell in the short term, and the company's operations showed toughness, and actively promoted the implementation of aramid coating film projects. Domestic mid-aramid price competition intensified in 2023; demand for counterpart aramid weakened and international leaders resumed supply, and product prices fell, but the company achieved varying degrees of growth in production, sales, revenue and gross profit of aramid and its products in 2023, highlighting the core competitiveness of the company's aramid products. According to the company's 2023 annual report, the company's nominal production capacity of aramid reached 26,000 tons at the end of the year, and the production capacity under construction was 26,000 tons, and production capacity is expected to increase rapidly. According to news on the company's official website, on April 29, 2024, the company and the two leading materials companies of Xingyuan Materials successfully held a joint press conference, officially launched aramid series diaphragm products jointly developed, and jointly invested in the establishment of Yantai Xinghe Battery Materials Technology Co., Ltd. Compared with today's mainstream ceramic or PVDF coatings, Star and SAFEBM aramid coated diaphragms have better thermal performance, liquid absorption, liquid retention performance, and lighter specific gravity, which can improve the electrical performance, safety and manufacturing efficiency of batteries. According to the company's 2023 annual report and investor exchange minutes of May 13, 2024, the company's lithium battery aramid coating diaphragm project was completed and put into operation in March 2023. Currently, it is a 30 million square meter production line. Samples have been sent to dozens of customers for testing, and the coating performance has been unanimously recognized by downstream customers. At present, the aramid coated diaphragm project has passed on-site audits by many battery customers, and good progress has been made in projects such as power batteries, household storage batteries, low temperature batteries, and semi-solid state batteries. Some customers have achieved small-batch orders, and new workshops and production lines are already under construction. We are optimistic about the expansion of the company's aramid production capacity and layout in the direction of aramid coating films. We believe that the profitability of the company's aramid sector may continue to increase.
Investment advice: We expect Taixin Materials's 2024-2026 revenue to be 51.58/65.26/7.588 billion yuan, up 31.40%/26.53%/16.27% year on year, and net profit to mother of 4.36/6.24/729 million yuan respectively, up 30.78%/43.16%/16.93% year on year, corresponding EPS of 0.50/0.72/0.84 yuan respectively. Combined with the company's closing price on May 22, the corresponding PE was 22/15/13 times, respectively. We are based on the following two aspects: 1) We believe that the price of spandex will gradually bottom out or drive the clearance of underdeveloped production capacity, industry concentration is expected to gradually increase, and the company, as one of the leading companies in the industry, is expected to benefit from this trend in the medium to long term. 2) We are optimistic about the expansion of the company's aramid production capacity and layout in the direction of aramid coating films. We believe that the profitability of the company's aramid sector may continue to increase and maintain a “buy” rating.
Risk warning: risk of rising production costs, risk of product price fluctuations, risk of increased market competition, management and talent risk