Key points of investment:

Company announcement: In the first three quarters, it achieved revenue of 2.189 billion yuan (YoY +15%), realized net profit of 0.18 billion yuan (YoY -11.8%), and realized net profit of 0.173 billion yuan (YoY -11%); of these, 24Q3 achieved revenue of 0.706 billion yuan (YoY +9.35%, QoQ -4.45%), and achieved net profit attributable to mother of 33.04 million yuan (YoY -50.2%, QoQ -53.5%) ), realized net profit of 32.86 million yuan (YoY -47.1%, QoQ -51.45%). The year-on-year decline in profit in the third quarter was mainly due to the confirmation of one-time salt lake lithium extraction revenue in the third quarter of last year; the month-on-month decline was mainly due to maintenance affecting sales in the aliphatic amine sector and delays in production and sales due to the replacement of isopropyl alcohol catalysts.

Fatty amines grew steadily in the first three quarters. Production and sales of organic solvents were affected by isopropyl alcohol catalysts, and the Ningxia base's contribution increased while the fragrance business resumed. Profits increased due to cost increases and one-time revenue confirmed last year from the Salt Lake Project declined year-on-year. According to the company announcement, 1) In the chemical business, the revenue of fatty amines in the first three quarters was about 1.058 billion yuan (YoY +17%), with production and sales volumes of about 0.0902 million tons (YoY +25%) and 0.091 million tons (YoY +23%), respectively. The main increase came from some small varieties such as butamine, but due to rising acetone costs and a decline in average prices, gross margin declined year-on-year; organic solvent revenue was about 0.331 billion yuan (YoY -6%), and production and sales volume was about 0.0395, respectively Million tons (YoY -12%) and 0.0405 million tons (YoY -10%). Prices were mainly affected by isopropyl alcohol replacement catalysts, and prices were driven by an upward trend in raw acetone, which increased the average price of organic solvents by 5% year-on-year to 8,190 yuan/ton in the first three quarters. 2) The fragrance business achieved revenue of 0.576 billion yuan (YoY +67%) in the first three quarters, mainly due to relatively good market demand, the company's Jiangsu Xinrui fragrance production and sales, and the gradual commissioning of the Ningxia project contributed to an increase in fragrance sales of 69% year-on-year to 0.0169 million tons in the first three quarters, but the Ningxia project was still at a loss in the first three quarters. Overall, due to the influence of fatty amines and fragrances, gross margin fell 3.65 pcts to 20.96% year over year, driving net profit margin down 2.43 pcts year over year to 9.76%.

Profits declined month-on-month in the third quarter due to the impact of maintenance, as well as the replacement of isopropyl alcohol catalysts and price declines. According to the company's announcement, aliphatic amines were affected by maintenance in the third quarter, with revenue falling 13% month-on-month to 0.324 billion yuan, and sales of isopropyl alcohol falling 8% month-on-month to 0.0288 million tons. Due to catalyst replacement delays production and sales, revenue fell 23% month-on-month to 90.76 million yuan, and sales fell 14% month-on-month to 0.0119 million tons. Furthermore, due to falling acetone prices, the price of isopropyl alcohol declined significantly month-on-month. Demand for spices was maintained. The Jiangsu base was full of production and sales. The Ningxia base was affected by heavy rainfall and is still in a state of loss. Production and sales have gradually resumed. In the third quarter, fragrance revenue increased 7% month-on-month to 0.202 billion yuan, and sales increased 14% month-on-month to 6148 tons. As a result, gross margin fell 2.73 pcts month-on-month to 18.89% in the third quarter, and net profit margin fell 4.87 pcts month-on-month to 6.17%.

The extraction business continues to expand, and industrial funds invest in new technologies to seek new material supply opportunities. The company is still actively cooperating with battery recycling companies and automakers. Early announcements are expected to be made to cooperate with Geely Yaoning on battery recycling projects. It is expected that the first phase of the battery black powder recycling project will be put into operation by the end of the year. After the first phase of the project is completed, the second phase will add 0.035 million tons/year of waste lithium battery recycling, and the third phase will add 0.05 million tons/year of waste lithium battery recycling, for a total of 0.1 million tons of lithium batteries. With its own extractant advantages, Xinhua has a high lithium recovery rate and low recycling costs. Currently, it is gradually cooperating with automakers and battery recycling companies. The project is the company's first battery resource recycling project, and it will gradually enter the battery recycling market in the future. Furthermore, the company previously announced that the Industrial Fund will invest close to 2% of Xincun Technology's shares to seek opportunities to supply new materials.

Profit forecast and valuation: The profit forecast is maintained for the time being. The estimated net profit for 2024-2026 is about 0.277, 0.39, and 0.496 billion yuan, respectively, corresponding to about 16, 11, and 9 times PE, maintaining a “buy” rating.

Risk warning: fragrance production capacity falls short of expectations; battery recycling project progress falls short of expectations