Key points of investment:

Company announcement: The first three quarters achieved revenue of 0.523 billion yuan (YoY +43.6%), realized net profit of 0.114 billion yuan (YoY +163%), and realized net profit of 0.108 billion yuan (YoY +184%), of which 24Q3 achieved revenue of 0.127 billion yuan (YoY -0.08%, QoQ -35.5%), and realized net profit to mother of 17.23 million yuan (YoY +324%, QoQ- 71.9%), achieving net profit of 16.1 million yuan after deducting non-return to mother (YoY +349%, QoQ -72.0%). The month-on-month decline in revenue and profit in the third quarter was mainly due to denitrification molecular sieve sales being affected by BASF's pace of picking up goods, and there was a significant month-on-month decline.

Sales of sold out molecular sieves resumed growth in 2024, and cooperation with BASF continued to deepen. In 2023, the company experienced the impact of BASF's inventory removal and downstream demand. The company quickly resumed sales of denitrification zeolite this year and achieved significant year-on-year growth. Among them, the third quarter was affected by BASF's pace of picking up goods, and there was a marked decline from month to month. 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 sales of molecular sieves and the gradual launch of catalysts have led to increased profitability. The company's gross margin increased by 0.51 pct to 38.9% year-on-year in the first three quarters, mainly due to the confirmation of the satellite HPPO catalyst process package of about 20 million yuan in the second quarter of last year, so 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 9.85pct to 21.73%. In the third quarter, due to a marked decline in denitrification zeolite sales, gross margin fell 5.27 pct to 36.49% month-on-month, and on the cost side, overall management and R&D rates increased by 12.99 pcts month-on-month. Financial expenses were affected by exchange losses, resulting in a decline of 17.6 pct to 13.55% month-on-month. Fund-raising projects have been upgraded one after another. By the end of September 2024, the company's fixed assets increased by 22.45 million yuan compared to the end of June, and the number of projects under construction decreased by 25.61 million yuan, mainly due to the transformation of the IPO fund-raising project to industrialize special molecular sieves, environmental catalysts, and automobile exhaust purification catalysts.

Profit forecast and valuation: Considering the decline in denitrification zeolite sales and the profitability of the new catalyst being lower than that of denitrification zeolite, the profit forecast was lowered. Net profit to mother for 2024-2026 is estimated to be about 0.153, 0.187, and 0.227 billion yuan (original forecast 0.183, 0.222, 0.258 billion yuan), corresponding to PE about 25, 21, and 17 times, respectively, maintaining the “increase” rating.

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