Based on nylon 66, the company has continued to achieve industrial breakthroughs over the years. The company spans the two major industries of chemicals and chemical fiber, and has formed a new industrial pattern based on leading products such as nylon 66 salt and nylon 66 salt intermediate products, engineering plastics, industrial wire (curtain cloth), BCF carpet wire, airbag wire, etc., and based on raw and auxiliary materials and related products. The company is one of the few market-leading enterprises in the domestic nylon 66 industry with large-scale production capacity and integrated production capacity for upstream raw materials. The production scale of nylon 66 industrial wire, curtain cloth and slices ranks first in the country. Nylon 66 series products are the company's core revenue source. Since 2022, new products such as nylon 6 civil wire and nylon 6 slices have gradually contributed to the company's overall revenue.

The fields of automotive lightweighting and civil wire are expected to increase demand for nylon 66 in the future. In terms of automobile weight reduction, nylon materials have excellent properties and can be widely used in core automotive systems such as engines and fuel supply. Among them, PA6 and PA66 are the main application varieties, accounting for more than 90% of usage, contributing outstanding value to the weight reduction of traditional fuel vehicles and new energy vehicles. The rapid increase in the amount of plastic bicycles used in China and the penetration rate of the NEV market will jointly drive the growth in demand for nylon 66. In terms of civilian wire, nylon 66 has superior performance compared to nylon 6, and is expected to expand further into the civilian field in the future. We believe that at present, the application of nylon 66 in the field of civilian wire in China is still in its infancy, and there is still plenty of room for growth in the future.

The domestic substitution process for adiponitrile has been accelerated, and the nylon 66 industry is expected to usher in a new development cycle. Adinitrile and adipic acid are the two core raw materials of nylon 66. Among them, adiponitrile production technology is difficult, limiting the expansion of China's nylon industry. The supply of adiponitrile is mainly monopolized by foreign companies. China is dependent on imports of adiponitrile, and the higher price of adiponitrile puts a certain pressure on the development of domestic downstream nylon companies. Large historical price fluctuations of adiponitrile have led to wide fluctuations in the price of nylon 66, which has affected the downstream application of nylon 66 to a certain extent.

The domestic substitution process for adiponitrile has been accelerated, and many domestic companies are striving to achieve localized supply of nylon 66 core raw materials. As of 2022, the total production capacity of adiponitrile under construction and planned in China is 2.73 million tons, mainly the butadiene method. We believe that in the medium to long term, the localization of adiponitrile is expected to bring about a stable supply of adiponitrile, reduce the fluctuation in the price of adiponitrile, reduce the price fluctuation of nylon 66, and the domestic nylon 66 industry chain is expected to benefit from this, thus promoting the rapid development of the nylon 66 industry. Furthermore, the localization of adiponitrile will help reduce the production cost of nylon 66, enhance the competitiveness of nylon 66 in the field of civil wire, and thus drive an increase in demand for nylon 66.

The company's industrial chain has been extended in both directions, and the advantages of integration have gradually become apparent. On the vertical side, the company is actively expanding the industrial chain and striving to achieve independent supply of key raw materials and ensure production stability. Currently, adipic acid production capacity in high-tech plants has been put into production, and the adipitrile project and the nylon hydrogen-ammonia project are under construction. The nylon hydrogen-ammonia project can provide a stable supply of raw materials and reduce production costs for downstream nylon 66 salt production. On the horizontal side, the company continues to enrich its product matrix and gradually expand into the field of nylon 6 and nylon 66 civil wire. As related production capacity is built and put into operation one after another, we believe that the company's industrial chain integration advantages will become more obvious. Furthermore, the company is moving from domestic to overseas, and is actively building a base in Thailand to meet the needs of overseas customers. The company plans to build an overseas nylon 66 industrial production base in the industrial park of Thailand's “Eastern Economic Corridor”. The first phase of the project includes 7,000 tons of nylon 66 industrial wire and 3,000 tons of nylon 66 fine denier wire. The completion of the Thai base will help expand and meet the development requirements of the tire manufacturing industry in Southeast Asia and North America.

Investment advice: We expect Shenma's revenue for 2024-2026 to be 15.38/17.754/20.301 billion yuan, up 19.0%/15.4%/14.3% year on year, net profit to mother 0.342/0.575/0.762 billion yuan respectively, up 177.4%/68.0%/32.5% year on year, and corresponding EPS of 0.33/0.55/ 0.73 yuan respectively. Combined with the company's closing price on July 26, the corresponding PE was 18/11/8 times, respectively. We are based on the following two points: 1) the increase in demand for nylon 66 brought about by automobile lightweighting and the expansion of applications in the civil wire field; 2) the localization of adiponitrile pushes the nylon 66 industry to usher in a new development cycle; 3) the company's industrial chain is expanding in both directions, and the advantages of integration are gradually showing, maintaining a “buy” rating.

Risk warning: risk of macroeconomic fluctuations, risk of raw material supply and price fluctuations, risk of project returns falling short of expectations, risk of trade friction