Incident: On April 24, 2024, Longbai Group released its 2023 annual report. The company's revenue for 2023 was 26.765 billion yuan, up 11.00% year on year; net profit to mother was 3.226 billion yuan, down 5.64% year on year; net profit after deducting non-net profit was 3.116 billion yuan, down 4.68% year on year. The corresponding company's 4Q23 revenue was 6.511 billion yuan, down 7.28% from the previous month; net profit to mother was 1,084 billion yuan, up 23.23% from the previous month.
On April 24, 2024, Longbai Group released its 2024 quarterly report. The company's 1Q24 revenue was 7.294 billion yuan, up 4.54% year on year, up 12.03% month on month; net profit to mother was 951 million yuan, up 64.15% year on year, down 12.29% month on month;
Comment: The decline in average product prices led to a decline in gross margin, and the company's annual performance was under pressure in the short term. According to the company's 2023 annual report, the revenue of the company's 2023 titanium dioxide, iron products, zirconium products, sponge titanium, new energy materials and other sectors was 177.68/25.73/11.02/22.68/10.47/1,131 billion yuan respectively, YoY was 9.83/3.60/4.99/6.27/59.71/69.75%, respectively; gross margins were 28.51/49.15/13.33/17.87/-3.31/ 14.33%, year-on-year change of -0.42/ +4.36/-10.18/-10.58/-15.66/-14.28pcts.
The year-on-year increase in the company's revenue is mainly related to the company's effective increase in capacity utilization and the increase in sales of major products.
In 2023, the company sold 1.158,900 tons of titanium dioxide, up 24.93% year on year; sold 796,400 tons of sulfuric acid titanium dioxide, up 22.15% year on year; sold 362,500 tons of chlorinated titanium dioxide, up 31.48% year on year; sold 47,000 tons of titanium sponge, up 28.15% year on year; other products: sold 4.338 million tons of iron concentrate, a decrease of 0.65% year on year; produced 661,000 tons of iron phosphate, an increase of 157.80% over the same period last year. The decline in the company's gross margin is mainly related to the decline in the prices of major products. According to data from the Chamber of Commerce, the average price of titanium dioxide in 2023 was 16,600 yuan/ton, a decrease of 12.17% over the previous year.
In 2023, the company's sales expenses increased 27.70% year on year, the sales expense ratio was 2.04%, up 0.27 pcts year on year; financial expenses rose 132.72% year on year, financial expenses rate was 0.89%, up 0.47 pcts year on year; management expenses decreased 29.83% year on year, management expenses were 3.73%, down 2.17 pcts year on year; R&D expenses increased 0.04% year on year, and R&D expenses were 3.78% year on year down 0.42 pcts year on year.
The price of titanium dioxide has gradually bottomed out and rebounded, and the company's performance is expected to gradually recover. According to data from Business News Agency, from January to January 2024, the average price of titanium dioxide was 16453.62/16680.95/17107.14 yuan/ton, with year-on-year changes of 3.27%/2.84%/0.14%, respectively, and -0.52%/1.38%/2.55%, respectively. The year-on-year increase in the price of titanium dioxide contributed to the year-on-year increase in 1Q24 company's performance. On a month-on-month basis, the price of titanium dioxide gradually bottomed out in January 2024. Currently, it is in an upward channel, and the company's performance is expected to gradually recover.
There is some fluctuation in the cash flow generated by the company's various activities. Net cash flow from operating activities in 2023 was $3.404 billion, up 6.49% year on year; net cash flow from investment activities was -2,977 billion yuan, up 46.74% year on year; net cash flow from financing activities was -1,220 million yuan, down 142.15% year on year; and the balance of cash and equivalent at the end of the period was $1,601 billion, down 33.44% year on year.
Accounts receivable increased 33.71% year over year, and the accounts receivable turnover decreased from 11.43 times to 10.17 times; inventory increased 11.94% year over year, and inventory turnover decreased, from 3.04 times to 2.83 times.
China's titanium dioxide production capacity is steadily increasing, and the export share is gradually expanding. The company is expected to increase its market share with its leading edge. With the withdrawal of titanium dioxide production capacity from some foreign countries, such as Kemu and Panenergy Development, China's share of titanium dioxide production capacity has gradually expanded. According to Tuduoduo's data, the global production capacity of titanium dioxide in 2023 was 9.819 million tons, and China accounted for 55% of the production capacity. Most of the new production capacity came from China. In terms of output, according to statistics from the Titanium Dioxide Industry Technology Innovation Strategic Alliance Secretariat, the total output of China's titanium dioxide industry in 2023 was 4.16 million tons, an increase of 6.3% over the previous year, reaching another record high. Compared with local European titanium dioxide companies, domestic titanium dioxide companies have advantages in terms of cost and environmental protection. Their market competitiveness is outstanding, and China's titanium dioxide export share is gradually expanding. According to the company's 2023 annual report, China's exports of titanium dioxide reached 1.64 million tons in 2023, with a compound growth rate of 13.09%. Domestic titanium dioxide exports accounted for 34.50%, 39.13% and 41.07% respectively in 2021-2023, and the export share increased year by year. We believe that with the increasing competitiveness of domestic titanium dioxide companies, there is still room for growth in titanium dioxide exports in the future.
Among global titanium dioxide manufacturers, the company has a stable position as a leader in the industry. The company currently has a titanium dioxide production capacity of 1.51 million tons/year, making it the world's largest producer of titanium dioxide in terms of production capacity. The company is also one of the few titanium dioxide suppliers in the titanium dioxide industry that also has sulfuric acid and chlorination processes. It is the only titanium dioxide manufacturer in China that has penetrated the entire titanium industry chain. As environmental protection policies become stricter in the future, small and medium-sized production capacity with high energy consumption will gradually be withdrawn, and market share will be concentrated on leading companies. The company is expected to profit as a leading enterprise with mature chlorinated titanium dioxide production technology. We believe that as the competitiveness of the domestic titanium dioxide industry increases, the export share is expected to expand further in the future, and that domestic small to medium backward production capacity will gradually be cleared under the energy consumption requirements of higher energy consumption. As a leading titanium dioxide company with technical advantages, the company is expected to gradually expand its market share with its competitive advantage.
The supply pattern of titanium sponge has changed, and the company lays out the middle and high-end product field. China's sponge titanium production capacity continues to grow. According to the company's 2023 annual report, the global titanium sponge production capacity in 2023 was 444,000 tons. China's production capacity accounted for 63%, and the share of production capacity gradually increased. Affected by the Russian-Ukrainian conflict, the Ukrainian titanium sponge factory was shut down, and supply was reduced by 12,000 tons. Currently, the production growth rate of high-quality titanium sponge cannot meet the increase in demand. In the future, as the localization process of large aircraft accelerates, demand for high-end titanium sponge for aerospace is expected to grow steadily. The company currently has a production capacity of 50,000 tons of sponge titanium. Yunnan Guotai has an annual output of 30,000 tons of rotor grade sponge titanium intelligent manufacturing technology improvement project phase II (15,000 tons) and Gansu Guotai 30,000 tons/year rotor grade sponge titanium technology upgrading and transformation project phase II (15,000 tons). After completion of the project, the company's sponge titanium production capacity will grow to 80,000 tons/year. We are optimistic about the company's layout and production capacity advantages in the middle and high-end sponge titanium field. It is expected that the company's sponge titanium sector will achieve performance growth amid rising demand.
The company's capital expenditure is large, and several projects have obtained EIA approval. According to the company's 2023 annual report, the 7 million ton green and efficient beneficiation project, the 7 million t/a vanadium-titanium magnetite green and efficient beneficiation innovative technical improvement project, the 200,000 ton rutile titanium dioxide post-treatment project, the 10K ton/year sponge titanium production line upgrade innovation project, and the 50,000 ton ultra-high power graphite electrode project have obtained EIA approval. The 200,000 tons/year chlorinated titanium dioxide construction project, the 13 million t/a mining project in the Honggebei mining area, the renovation and expansion of ultra-high power graphite electrodes with an annual output of 80,000 tons and its deep processing project, and the green manufacturing project for lithium battery materials with an annual output of 300,000 tons are being prepared. We are optimistic about the implementation and completion of the project, which is expected to increase the company's performance.
Investment advice: We expect Longbai Group's revenue for 2024-2026 to be 312.53/350.24/37.710 billion yuan, up 16.77%/12.07%/7.67% year-on-year, and net profit to mother of 39.90/47.07/5.523 billion, respectively, up 23.68%/17.96%/17.33% year-on-year, and corresponding EPS of 1.67/1.97/2.31 yuan respectively. Combined with the company's closing price on May 29, the corresponding PE was 13/11/9 times, respectively. We are based on the following three aspects: 1) We believe that as the competitiveness of the domestic titanium dioxide industry increases, the export share is expected to expand further in the future, and that domestic small to medium backward production capacity will gradually be cleared under energy consumption requirements. As a leading titanium dioxide company with technical advantages, the company is expected to gradually expand its market share with its competitive advantage. 2) We are optimistic about the company's layout and production capacity advantages in the high-end sponge titanium field. It is expected that the company's sponge titanium sector will achieve performance growth amid rising demand. 3) We are optimistic about the implementation and completion of the project. We expect it to contribute to the company's performance and maintain a “buy” rating.
Risk warning: Company operation and management risks, risks caused by increased environmental standards, risk of price fluctuations of products and raw materials, risk of product demand risk, risk due to exchange rate fluctuations