Key points of investment:

The company released its 2024 mid-year report, and the results slightly exceeded expectations. According to the company's announcement, in the first half of 2024, the company achieved revenue of 0.396 billion yuan (YoY +67%), achieved net profit due to mother of 96.43 million yuan (YoY +146%), and realized net profit of 91.86 million yuan (YoY +166%); of these, 24Q2 achieved revenue of 0.197 billion yuan (YoY +73.3%, QoQ -1%), and realized net profit to mother of 61.36 million yuan (YoY +65.1%) QoQ +75%), achieving net profit of 57.53 million yuan after deducting non-return to mother (YoY +73%, QoQ +67.6%).

Denitrification zeolite sales quickly resumed growth in the first half of the year, and the upgrade continued to be deeply tied to BASF. According to the company's announcement, the company's revenue from BASF increased 102% year-on-year in the first half of the year. Last year, it experienced effects such as BASF's inventory removal and downstream demand. The company quickly resumed sales of denitrified molecular sieves this year. We estimate that in the first half of the year, the company sold about 1200-1,300 tons of denitrified molecular sieves to BASF, which nearly doubled year-on-year growth. The company signed a procurement agreement with BASF in the early stages, and the product sales area expanded globally, so it is expected that sales of denitrification molecular sieves will continue to increase in the future as demand grows in emerging markets such as India, Thailand, Europe, and South Africa. In addition, the company is actively upgrading its products. It has now prepared for the Euro7 standard in advance. The new brand is the company's exclusive patent synthesis. The cost template agent is relatively low, and the gross margin is high, so it has achieved deep ties with BASF while improving its own profitability.

Catalyst varieties are gradually being developed, and efforts are being made to achieve more flowering. There were breakthroughs in some metal catalysts in the first half of the year. For example, methanol-to-formaldehyde catalysts were sold in batches to Wanhua and had a good demonstration effect among peers. Stable supply is expected to be achieved later; supply of hydrogen peroxide catalysts will begin in the second quarter. Furthermore, in terms of titanium-silicon zeolites, HPPO catalysts are awaiting customer confirmation and replacement in the second half of the year, and new domestic and foreign customers are also continuing to deploy; caprolactam catalysts are increasing market share through continuous cost reduction and improvement. Strive for catalysts to blossom more.

Increased profitability due to increased sales of denitrification molecular sieves and the launch of chemical catalysts led to a continuous recovery in profitability. In the first half of the year, the company achieved a gross profit margin of 39.67%, a year-on-year decline of 2.39 pct. Mainly due to the confirmation of a satellite HPPO catalyst process package of about 20 million yuan in the second quarter of last year, the gross margin for the same period last year was relatively high. On the cost side, with the increase in sales scale, all expense ratios declined, leading to a year-on-year increase in net profit margin of 7.81 pct to 24.35%. In the second quarter, gross margin increased by about 4.15pct to 41.76% month-on-month due to the sale of new zeolite brands and sales of some catalysts. On the cost side, management expenses declined month-on-month due to reduced equity incentive costs, driving net profit margin to increase 13.52 pcts month-on-month to 31.15%. Fund-raising projects have been upgraded one after another. By the end of June 2024, the company's fixed assets increased by 82.42 million yuan compared to the end of March, and the number of projects under construction decreased by 79.98 million yuan compared to the end of March, mainly due to the transformation of special molecular sieves, environmental catalysts, and automobile exhaust purification catalysts industrialization projects for IPO fund-raising projects.

Profit forecast and valuation: Considering the gradual supply of the company's new denitrification zeolite grades and the supply of some catalysts, the profit forecast for 2024-2026 was raised. The estimated three-year net profit to mother is about 0.183, 0.222, and 0.258 billion yuan (original forecast 0.164, 0.203, 0.254 billion yuan), corresponding to PE by about 19, 16, and 13 times, respectively, maintaining the “increase” rating.

Risk warning: Catalyst customer expansion falls short of expectations; denitrification molecular sieve orders fall short of expectations