Investment summary

Incident Overview

The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 0.935 billion yuan, a year-on-year increase of 24.63%, and realized net profit to mother of 0.124 billion yuan, a year-on-year decrease of 21.02%. Among them, 2024Q2 achieved operating income of 0.5 billion yuan, a year-on-year increase of 33.16%, and a month-on-month increase of 14.81%; realized net profit to mother of 0.07 billion yuan, a year-on-year decrease of 16.39%, and an increase of 31.19%.

The main business is stable, and the vegetable capsule business is growing rapidly

Cellulose ether is the company's main business. Its revenue accounted for 74.26% of total revenue in the first half of the year. The downstream mainly involved construction materials, food and medicine. In 2023, due to factors such as poor economic recovery at home and abroad, the decline in the real estate market, inventory removal from overseas customers, and disorderly expansion of the industry, the company's cellulose ether business was under great pressure, and revenue and gross profit declined to a certain extent. In the first half of 2024, the company's cellulose ether business stopped falling and rebounded, achieving a total revenue of 0.695 billion yuan, an increase of 25.84% over the previous year.

In the first half of the year, Hershey, a subsidiary of the company mainly engaged in the vegetable capsule business, increased its market development efforts. Revenue and profit increased significantly compared to last year, achieving sales revenue of 0.201 billion yuan, an increase of 50.47% over the previous year, and net profit of 0.07 billion yuan, an increase of 72.93% over the previous year. The company's vegetable capsule business is a downstream extension of the pharmaceutical and food-grade cellulose ether industry chain. Currently, vegetable capsule products have reached the leading level in the industry, and the gross margin has stabilized at more than 50%, which is one of the company's high-growth revenue sources. In November 2023, the Hershey second-generation capsules developed by the company were officially launched. Compared with first-generation capsules, they do not contain gels, have better solubility, and meet the pharmacopeia requirements of major countries and regions. Second-generation capsules are expected to open up market space in the field of pharmaceutical products, especially in the traditional Chinese medicine industry, which requires high moisture absorption of capsules.

The product structure is diverse and is expected to usher in a new stage of rapid development

The company's product structure is diverse. The cellulose ether series products include building material-grade cellulose ether, pharmaceutical-grade cellulose ether, and food-grade cellulose ether; in 2023, the company acquired Zhongfuheda to improve the cellulose ether product portfolio and improve the overall competitiveness of hydroxyethyl cellulose ether (HEC) series products. By the end of 2023, the company had a cellulose ether production capacity of 0.085 million tons. The production capacity of vegetable capsule series products is 50 billion capsules, and the capacity utilization rate in 2023 is only 38.62%, mainly due to global economic recovery falling short of expectations and overseas customers removing inventory; however, with the registration and listing of second-generation vegetable capsules and mass sales, the company's vegetable capsule business has returned to a stage of rapid growth. We believe that the worst period for the company is over, the high-value-added series products are about to enter a vigorous expansion process, and the company is expected to usher in a new stage of rapid development.

Investment advice

The company's main business stabilized in the first half of the year, and the vegetable capsule business returned to a high growth stage. We expect the company's revenue for 2024-2026 to be 1.891 billion yuan, 2.33 billion yuan and 2.567 billion yuan respectively, net profit to mother 0.273 billion yuan, 0.39 billion yuan and 0.432 billion yuan respectively, and EPS 0.80 yuan, 1.14 yuan and 1.26 yuan respectively. Corresponding PE was 14.74 times, 10.32 times, and 9.32 times, respectively. Maintain a “buy” rating.

Risk warning

Market development falls short of expectations; international trade friction; raw material prices fluctuate