Key points of investment:

The company is deeply involved in the field of lubricant additives, and the smooth transition from single agent to compound agent helped the company achieve rapid growth in operating income and net profit to mother. The company was founded in 1996. According to the purpose, the products can be divided into two categories: lubricant additives and carbonless paper colorants. In 1999, the company began to develop lubricant additive products; in 2019, the company's compound product line and product grade developed comprehensively and rapidly. The compound growth rate of the company's revenue in 2018-2023 was 39.6%; the compound growth rate of net profit to mother was 60.7%. In 2018-2023, the company's R&D cost rate continued to rise. The company is promoting the transformation of products from medium to low level to middle level and developing the high-end compound market.

Downstream lubricant companies have strict evaluation conditions, and the entry threshold for the industry is high. Lubricant additives are divided into single agents and compound agents. Single agent products usually have only a single effect on improving the performance of lubricants. Compounds usually have a compound effect. The main applications include automobile engine (including natural gas engine) lubricants, aerospace engine oil, and railway locomotive engine oil. Lubricant additives generally account for about 2%-30% of the overall proportion of lubricating oil. In the process of developing new products, large investments are required to carry out bench tests, driving tests, product API certification, etc.

The global lubricant additives market is expected to reach 19.5 billion US dollars by 2025, and there is plenty of room for import substitution. According to the “Analysis of the Domestic and Foreign Lubricant Additives Market”, citing the “2021-2027 China Lubricant Additives Industry Market Operation Pattern and Investment Risk Assessment Report” published by Intelligent Research Consulting, the global lubricant additive consumption market reached 14.4 billion US dollars in 2020. It is estimated that by 2025, the global lubricant additive market size will be about 19.5 billion US dollars. China is one of the world's largest consumers of lubricants. The average annual growth rate of China's lubricant additive consumption from 2013 to 2020 was about 3.35%. Internationally renowned lubricant additive companies are Lubrizol, Infineum, Chevron Orient, and Afton. The four major companies control about 85% of the global additive market share.

The company's API certification is progressing smoothly, and it is actively expanding production to achieve import substitution. The company's CI-4, CK-4, SN and SP grade compounds have passed the bench tests of authoritative foreign parties. The first phase of the “Lubricant Additive Series Product Project with an annual output of 0.15 million tons” was put into production and use in the third quarter of 2022, and the second phase is expected to reach the scheduled state of use on December 31, 2025. The “Lubricant Additive Series Product Project with an annual output of 0.46 million tons” is expected to be ready for use on December 31, 2025.

Profit forecasting and investment ratings. We expect the company's 2024-2026 net profit to be 715, 8.39, and 1,039 million yuan, and EPS of 2.45, 2.87, and 3.56 yuan. Referring to the valuation of comparable companies in the same industry, PE was given 17-20 times in 24 years. The corresponding reasonable value range was 41.65-49.00 yuan. For the first time, coverage gave a rating superior to the market.

Risk warning. Downstream demand falls short of expectations; the progress of fund-raising projects falls short of expectations; the risk of increased competition in the industry.