Key points of investment:

Company announcement: The company released its 2024 quarterly report. During the reporting period, it achieved operating income of 1,515 billion yuan (YoY -8%, QoQ -20.31%), net profit to mother of 165 million yuan (YoY -32.8%, QoQ -22.9%), and net profit after deducting non-return to mother of 184 million yuan (YoY -19.52%, QoQ -12.8%). The performance was lower than expected. In terms of gross margin, the electrolyte business boom fluctuated at the bottom. The company's 24Q1 gross profit margin declined by 27.21%, down 4.32 pcts year on year, and increased 1.12 pct month over month; in terms of period expenses, sales expenses, management expenses, and R&D expenses changed by +526.74, -724.56, and -34,1461 million yuan year on year, respectively. At the same time, due to fluctuations in the Q1 exchange rate, the company generated exchange earnings, which led to a year-on-year decrease of 9.087 million yuan in financial expenses, and 4.28 pcts to 10.76% year on year.

The domestic electrolyte boom gradually bottomed out, and the price of new orders fell after a few years overseas, dragging down the company's overall profit. Since 2024, the domestic electrolyte industry has remained at the bottom of the boom. According to the Baichuan Information Price Module, the average price of domestic electrolytes was 21,000 yuan/ton in 24Q1, down 53.49% year on year and 8.15% month on month. However, as the electrolyte boom continues to decline, the industry gradually began to clear up spontaneously, backward production capacity was withdrawn one after another, investment and construction projects continued to be delayed, and the growth rate of the month-on-month decline narrowed, and the economy is expected to gradually bottom out. Since overseas electrolyte sales use a quarterly subscription model, the price of new orders is low after a year, compounded by the low season for traditional electrolytes in the first quarter, causing the company's business volume and price to drop sharply, dragging down the company's overall profit. However, the company continues to improve the global layout of electrolytes, and the Polish lithium-ion battery electrolyte project was put into operation in the second quarter of 2023. It is expected that the proportion of overseas sales of products will continue to increase and support the continuous expansion of the business scale.

Short-term depreciation and amortization pressure on new factories increased, but overseas 3M definitively withdrew, and the long-term development logic remained unchanged. The company acquired Hisford through epitaxial, invested endogenously to build Hydefford, and rapidly expanded the scale of the fluorine chemical business. However, since Heidford specializes in tetrafluoroethylene and fluoropolymers, as an extension of the company's new industrial chain, it will still take some time for the new factory to climb the slope. Short-term depreciation and amortization pressure is high, dragging down the overall profit of the fluorine chemical sector. However, according to 3M's official website, 3M announced that it will withdraw from related businesses by the end of 2025, the EU's environmental policy is also gradually being tightened, and the supply chain of global semiconductor companies is gradually being restructured. With long-term technology accumulation, the company is expected to continue to expand its global market share on the basis of supply chain restructuring and contribute to major performance increases.

Some of the expenses dragged down the company's performance, and the repurchase plan showed the company's confidence. Due to the decline in the fair value of the company's transactional financial assets and depreciation in inventory prices, 2024Q1 affected the company's 28.9 million yuan and 12.16 million yuan, respectively, and dragged down the company's performance decline. However, based on confidence in its future development, the company proposed a new round of corporate repurchase plans. The total amount of the plan is proposed to be no less than 100 million yuan and not more than 200 million yuan, and the repurchase price should not exceed 45 yuan/share. Using the upper price limit, the estimated number of shares that can be repurchased is 2,22,200 shares, accounting for about 0.29% of the company's total share capital.

Investment rating and valuation: Due to increased competition in the electrolyte industry and downstream demand falling short of expectations, we lowered the company's profit forecast for 2024, expected to achieve net profit of 1,198 billion yuan (1,334 billion yuan before adjustment), maintain the profit forecast for 2025-2026, and expect to achieve net profit of 17.1 billion yuan, 2,425 billion yuan, and corresponding PE valuations of 20X, 14X, and 10X, respectively. According to Wind statistics, the company's current PB valuation is 2.696X, and the company's average PB valuation center for the three years from May 24, 2021 to the present is 4.476X. The margin of safety is high, and the “gain” rating is maintained.

Risk warning: product prices fluctuate greatly; raw material prices have risen sharply; new projects are not progressing as expected.