Key points of investment:
Company report: In the first half of the year, it achieved revenue of 1.687 billion yuan (YoY +1.4%), realized net profit of 0.139 billion yuan (YoY -33.7%), and realized deducted net profit of 0.124 billion yuan (YoY -38.2%); of these, 24Q2 achieved revenue of 0.853 billion yuan (basically flat year over year, QoQ +2.3%), and realized net profit to mother of 57.58 million yuan (YoY -52%, QoQ -29%). Non-return net profit of $53.79 million (YoY -53.6%, QoQ -24%), slightly lower than expected. The year-on-year decline in profit was mainly due to the relatively high price of anti-scorching agents in the same period last year. The month-on-month decline was mainly due to the rapid rise in shipping charges in Q2, and freight rates affected costs.
Driven by the expansion of downstream tire companies in the first half of the year, the company's rubber additive sales continued to rise, but some prices declined year over year, leading to a decline in profitability. According to Wind data, the average operating rate of semi-steel tires in China remained above 73% in the first half of the year, and about 57% of all steel. Semi-steel increased significantly compared to previous years, thus driving demand for rubber additives. It is estimated that the company's sales volume of products such as anti-scorching agents, accelerators, and insoluble sulfur increased in the first half of the year. However, the main profitable product, anti-scorching agents, were affected by the supply side and the raw material side. Prices declined in the second half of last year, and have now basically stabilized. As a result, revenue from high-performance rubber additives increased 15% year over year to nearly 1.2 billion yuan, driven by sales volume, but gross margin fell 14.43 pct to 14.35% year on year; revenue from multi-functional rubber additives fell 21% year on year to 0.49 billion yuan. Since most of the products are customized products, sales volume was affected by orders, but prices were relatively stable, so gross margin increased 10.84 pcts to 32.7% year on year (according to the company's interim report). Overall, gross margin fell by about 6.48 pcts to 19.7% year on year in the first half of the year, driving net profit margin down 4.35 pcts year over year to 8.23%.
Q2 Sales continued to increase slightly, but profits declined due to shipping costs. The operating rate of downstream tire companies continued to rise in the second quarter. We estimate that the company's sales volume of Q2 anti-coking agents was about 4,000 to 4,500 tons, and the price remained about 0.04 million yuan/ton; sales of accelerators and insoluble sulfur increased, but profits were relatively low, mainly due to the 10% and 15% increase in the average price of upstream raw materials aniline and sulfur Q2, respectively (according to Baichuan Information), and product prices remained flat, so profits narrowed somewhat. In addition, ocean freight rates rose rapidly in May-June, and the company's additive products needed to bear transportation costs, so profits narrowed again. As a result, the Q2 company's gross margin fell 2.18 pcts to 18.62% month-on-month. On the cost side, management expenses ratio and R&D expenses ratio increased, and the net profit margin fell 2.97 pct to 6.76% month-on-month.
Projects under construction are gradually being transformed, and many subsequent products drive growth. According to the company's interim report, as of the end of June 2024, the company's fixed assets increased by 0.313 billion yuan to 1.2 billion yuan compared to the beginning of the year, and the number of projects under construction decreased by 0.203 billion yuan to 0.29 billion yuan compared to the beginning of the year, mainly due to the gradual transformation of projects such as insoluble sulfur, amino resins, and accelerator DZ. We expect the company's insoluble sulfur to increase by 0.02 million tons, amino resin by 0.02 million tons, and the 6,000-ton accelerator DZ project and silane coupling agent project will gradually be put into operation in 2024, contributing to the overall increase in 2024. Furthermore, organic peroxides with high added value are scheduled to be put into operation in the second half of 2025. We believe that in a situation where cyclical fluctuations in the profits of traditional additives are gradually fading, more attention should be paid to the transformation of the company's results in new products, and it will blossom more in the future.
Profit forecast and valuation: Considering the impact of shipping costs and price differences of major additives, the profit forecast was lowered. The estimated net profit for 2024-2026 was about 0.3, 0.37, and 0.42 billion yuan (the original forecast was 0.35, 0.42, and 0.46 billion yuan), respectively, corresponding to PE about 10, 8, and 7 times, respectively, to maintain the “gain” rating.
Risk warning: the commissioning of projects under construction falls short of expectations; sales of new products fall short of expectations; large fluctuations in raw materials affect profit levels