Key points of investment:
Company announcement: In the first half of 2024, the company achieved operating income of 0.414 billion yuan (YoY +12.02%), net profit due to mother of 0.128 billion yuan (YoY +17.37%), and net profit of 0.127 billion yuan (YoY +22.73%) after deducting non-return to mother net profit of 0.127 billion yuan (YoY +22.73%), which is in line with expectations. Among them, Q2 achieved operating income of 0.223 billion yuan (YoY +11.7%, QoQ +16.21%), net profit of 0.066 billion yuan (YoY +14.71%, QoQ +6.93%), and net profit of 0.066 billion yuan (YoY +23.42%, QoQ +8.39%), which is in line with expectations.
The 24Q2 compound additives boom stopped falling, and demand for downstream terminals continued to rise. In terms of compound additives, the boom in anti-aging additives such as upstream antioxidants and light stabilizers gradually bottomed out, supporting the stable sales price of the company's compound additives. The scale of combined sales continued to grow. Compound additives achieved 0.033 billion in revenue in the first half of the year, an increase of 50% over the previous year. However, looking at demand for nucleating agents and hydrotalcite, according to Baichuan News and Zhuochuang Information, domestic production of PP Q2 reached 8.245 million tons, up 6.9% year on year; domestic production of PVC Q2 reached 5.73 million tons, up 6.8% year on year. Continued terminal demand supported the company to achieve revenue of 0.253 and 0.058 billion yuan for nucleating agents and synthetic hydrotalcite respectively in the first half of '24, with year-on-year increases of 24% and 20.8%, respectively. The company's profitability remained high, with a gross profit margin of 44.71% and a net margin of 29.65% in a single quarter in Q2. Overall, the downstream PP and PVC industry will enter a new production capacity investment cycle. The company's main products are nucleating agents, synthetic hydrotalc, and composite additives, which are key materials for manufacturing high-performance resins. As domestic PP and PVC production gradually develops to high-end, the company is expected to usher in a long-term boom.
M&A targets were gradually increased, new production capacity was released one after another, and the resilience of “endogenous+extension” performance was highlighted. The company took the lead in breaking the technology monopoly of leading international brands. Product performance indicators are at the international advanced level. As the trend of localization strengthens, the company is expected to continue to make profits. In terms of future development plans, the company's “endogenous+extension” will continue to expand horizontally and vertically to accelerate the increase in market share. On the endogenous side, as of July 2023, the company's Baiyun technical improvement project has added about 4,000 tons of nucleating agents and hydrotalcite production capacity, and the fund-raising project is expected to be put into operation within 2024, adding a total production capacity of about 36,600 tons. On the epitaxial side, the company acquired 100% of the shares of Keao Chemical and Cindafeng for 0.158 billion to expand the antioxidant business and create an integrated service model.
Profit forecast and valuation: Due to the rapid decline in earnings from single agents such as antioxidants and light stabilizers since the beginning of '24, we lowered the company's profit forecast for 2024-2025 and expected to achieve net profit of 0.266 and 0.311 billion yuan (0.294 and 0.39 billion yuan before adjustment), and added a profit forecast for 2026, which is expected to achieve net profit of 0.376 billion yuan. The PE valuation corresponding to the current market value is 17X, 15X, 12X According to Wind statistics, the company's current PB valuation is 3.745X. Since its listing on June 7, 2021, the average PB hub is about 5.947X, which has a high margin of safety and maintains an “gain” rating.
Risk warning: The commissioning of new projects falls short of expectations; downstream demand falls short of expectations.