Leading silicone sealant company, construction adhesives contributed major performance. The company was founded in 1998 and listed on GEM in 2009. After 26 years of intensive cultivation, the company has grown into a leading enterprise in the silicone sealant industry. According to the China Business Industry Research Institute, China's room temperature silicone rubber production in 2023 was 1.428 million tons. According to this estimate, the company's market share in 2023 is about 12.35%. Currently, the company's products mainly cover silicone construction adhesives, industrial adhesives, silane coupling agents, etc. Among them, construction adhesives are the company's main source of revenue and profit. In 2023, construction adhesives, industrial adhesives and silane coupling agents accounted for 63.01%, 27.01% and 7.87% of revenue, respectively, with gross profit accounting for 65.81%, 29.03% and 3.8% respectively.

The concentration of the industry continues to increase, and the market share of construction adhesives has further increased. The construction industry is the largest application area for silicone sealants. In 2019-2023, the company's revenue from construction adhesive products increased from 0.778 billion yuan to 1.642 billion yuan, with a CAGR of 20.53%. With the implementation of the “dual carbon” policy, the country has successively introduced relevant policies to limit and eliminate backward production capacity. The number of new entrants and existing enterprises in the industry has continued to shrink, and industry concentration continues to increase. In this context, with its scale and technical advantages, the company's production and sales volume grew steadily. In 2022, the company's construction glue sales volume was 0.113 million tons, and construction glue sales increased 23.63% year-on-year to 0.139 million tons in 2023. According to Huajing Industry Research Institute, the use of silicone sealants in the construction sector in 2021 was about 0.9405 million tons, and the compound growth rate from 2021 to 2025 was about 10.38%. Based on this estimate, the company's market share in the field of construction adhesives in 2022 and 2023 10.9% and 12.2% respectively, further increasing the market share. China is entering an important period of urban renewal, shifting from large-scale incremental construction to equal emphasis on stock upgrading and incremental structural adjustment. Stock house decoration, old house renovation, etc. can all provide room for steady growth of silicone sealing materials. At the same time, industry concentration continues to increase, and the market is increasingly concentrated on leading companies. As a leading silicone sealant company for construction, the company's market share is expected to increase further.

Downstream demand is improving, and industrial adhesives continue to contribute more. The company's industrial rubber products are mainly used in photovoltaics, electronic appliances, automobiles, electricity and other fields. Benefiting from the rapid development of photovoltaic new energy, new energy vehicles, power batteries, electronic information and other industries, as well as the rapid development of large-scale power grids and electrochemical energy storage industries, the company achieved rapid growth in sales of industrial rubber products. Revenue increased rapidly from 0.077 billion yuan to 0.704 billion yuan in 2019-2023, with a CAGR of 73.89%, and the revenue share rapidly increased from 7.56% in 2019 to 27.01 in 2023 %. Industrial rubber products have become the company's second largest source of revenue. Currently, demand for downstream applications of industrial adhesives is improving. The scale of industries such as new energy vehicles, integrated circuits, 5G, and the Internet of Things continues to grow. The automobile, electronics, and home appliance industries are bringing new demand and growth points to the silicone industry. The company will continue to deepen the application of industrial adhesives in the fields of photovoltaic solar energy, power batteries, automobile manufacturing, electronics and electrical appliances, and industrial adhesives are expected to continue to contribute to the company's performance growth.

Downstream demand is growing steadily, and silane coupling agents are gradually being released. Silane coupling agents are key additives in the production of high-end silicone sealants, photovoltaic adhesives, glass fibers, coatings, plastics, etc. In 2019-2022, the company's silane coupling agent revenue increased from 0.108 billion yuan to 0.329 billion yuan, with a CAGR of 44.96%. In 2023, due to changes in industry supply and demand, falling product prices, and the company's digital transformation capacity, the revenue of silane coupling agents fell 37.79% to 0.205 billion yuan year-on-year. 2024H1 due to high-value-added product production Increased, revenue improved, and revenue increased 13.22% year over year to 0.113 billion yuan. China has become an important global silane production base. Currently, market prices are declining due to stricter environmental protection policies, backward production capacity is gradually being cleared, and competition is intensifying. However, with the continuous expansion of silane coupling agents in new fields such as new photovoltaic energy, environmental protection, and high-end equipment manufacturing, and consumption restructuring in traditional fields such as the electronics industry and silicone compounds, demand is expected to continue to grow steadily. At present, all of the subsidiary Anhui SiBao's 8,500 tons/year silane coupling agent technical improvement projects have been completed and gradually put into operation. As production capacity is released at the pace of downstream demand, the contribution of silane coupling agent products to the company's performance is expected to increase further.

Focus on epitaxial development to help long-term growth. The company focuses on epitaxial development. In recent years, it has increased capital and acquired many companies to further improve the industrial chain layout. In April 2020, the company acquired 100% of Tuoli Technology's shares in the business of functional polymer materials such as silicone, epoxy, and UV curing in cash; in January 2023, the company used its own capital of 30 million yuan to increase the capital of Guangxi Warner, a high-quality supplier of nano-calcium carbonate, to acquire 3.53% of Guangxi Warner's shares; in June 2024, the company plans to acquire 100% of the shares in the hot melt adhesive company Jiangsu Jiahao. The first settlement of the July share acquisition was completed, and Jiangsu Jiahao began to be listed. Based on silicone materials, the company actively improves the upstream and downstream layout of the industrial chain and expands business areas through epitaxial methods, which helps to consolidate and further enhance the company's competitive advantage in the high-end sealing and bonding materials industry and help sustainable development in the future.

Investment advice: We expect the company to achieve operating income of 2.556/2.852/3.261 billion yuan in 2024/2025/2026, a year-on-year change of -1.90%/11.59%/14.31%, and achieve net profit of 0.265/0.308/0.345 billion yuan, year-on-year change of -15.77%/16.11%/11.98%. The current stock price corresponds to 2024/2025/2026 PE 16.19/13.94/ respectively 12.45X, first coverage, gives a “Highly Recommended” rating.

Risk warning: risk of macroeconomic fluctuations; risk of fluctuations in raw material prices; risk of new project construction falling short of expectations; risk of accounts receivable.