1H24 results exceed market expectations

The company announced 1H24 results, achieving revenue of 1.109 billion yuan, +23.7% year over year; net profit to mother 0.191 billion yuan, +27.0% year over year; net profit after deducting non-return to mother 0.184 billion yuan, +48.4% year over year; corresponding profit per share of 0.34 yuan, exceeding market expectations. We believe that mainly specialty surfactants (small varieties) are growing strongly. 1H24's specialty surfactants (hereinafter referred to as surfactants) sold 0.0842 million tons, which is a significant increase compared to the sales volume of 0.0604 million tons of 1H23 small varieties. Of these, 2Q24 achieved revenue of 0.577 billion yuan and net profit of 0.103 billion yuan to mother.

In terms of operating data, the average price of 1H24 sheets fell 1.4% year on year, the average price of cost side EO rose 1.9% year on year, and PO fell 6.1% year on year. In terms of expenses, the overall expenses of 1H24 remained stable year-on-year during the period, and R&D expenses increased 19.6% year-on-year. Product structure was optimized, and the company's 1H24 gross margin increased by 2.1ppt to 25.2%.

Development trends

Focus on strategic emerging sectors to improve profit quality. Due to the worsening competitive pattern and weak profitability in the water reducing agent industry, the company strategically withdrew from the water reducing agent sector to focus on “small varieties” of products with high added value. In particular, strategic emerging sectors include the high-end functional electronic chemicals sector (functional electronic chemicals, UV light curing, surfactants for wet electronic chemicals, etc.) and the functional new material resin sector (new energy rubber resins, MS resins, polyimide resins, polyether amines, etc.), which are the main driving forces for the company's rapid growth. The 1H24 strategic emerging sector achieved total sales volume of 0.0221 million tons and revenue of 0.285 billion yuan.

Construction of the third plant began to drive long-term growth. Construction of the company's third plant, Kaimeike New Polymer Materials, began this year. The first phase of the project mainly includes three major products: polyether amines, high-end surfactants, and polymer polyether. Early procedures such as the second phase of the EIA are in progress. We anticipate that the project may be gradually implemented in 2025-2026 to help the company grow in the long term.

Profit forecasting and valuation

Our 2024/25 profit forecast remains unchanged at 0.408/0.535 billion yuan, and the current stock price corresponds to 12/9 times P/E for 2024/25. Maintaining an outperforming industry rating and considering the downward sector valuation, we lowered our target price by 12% to 11 yuan, corresponding to 16/12 times the 2024/25 price-earnings ratio, with 33% upside compared to the current stock price.

risks

Macroeconomic downturn; Real Madrid's new polymer materials project is progressing less than expected; safety and other business risks.