Investment advice

Since this year, the price of the company's core product, photovoltaic grade high-purity quartz sand, has dropped sharply. According to data provided by SMM, as of the end of October, the average price of photovoltaic grade inner layer sand was 6.5 to 0.085 million yuan/ton, the average price of the middle layer sand market was 3.5 to 0.045 million yuan/ton, and the average price of the outer sand market was 1.9 to 0.03 million yuan/ton. We believe that on the one hand, the installed demand for photovoltaic modules has slowed; on the other hand, the domestic supply of medium and outer sand has increased, causing product prices to drop from a high level in the previous period. Considering the company's current large inventory, abundant supply of medium and outer photovoltaic sand, and the slight slow progress in the release of its semiconductor products, we downgraded the rating to “neutral” for the following reasons:

The company announced 3Q24 results, which fell short of market expectations: the company's 3Q24 revenue -89% YoY/-24% month-on-month to 0.26 billion yuan; net profit to mother -97% YoY/-43% month-on-month to 0.056 billion yuan. The company's single-quarter results fell short of our expectations and that of the market, or because demand did not improve in 3Q24, which affected the shipment of photovoltaic grade high-purity sand.

1) The price of 3Q24 photovoltaic grade high-purity sand is gradually stabilizing, but shipments are still weak: the company's 3Q24 revenue was -24% to 0.26 billion yuan month-on-month. Combined with SMM data, the domestic open market price of high-purity quartz sand gradually stabilized in the third quarter. We judge that the decline in revenue may be related to the company's product restructuring and the slowdown in the overall shipping pace of photovoltaic grade high-purity sand. 2) Gross margin decreased year over year and cost ratio increased year over year/month on month. The company's 3Q24 consolidated gross margin was -50ppt/month-on-month -6ppt to 39.8%; in addition, the company's 3Q24 expense ratio was +18ppt/month-on-month +8ppt to 22%, mainly due to the company's management expense ratio of +8.2ppt/month-on-month +1.5ppt to 9.9% year-on-year during the reporting period; R&D expense ratio +8.9ppt/month-on-month +4.6ppt to 10.8% year-on-year. 3) Net operating cash flow is under marginal pressure, and capital expenditure is low. The company's net operating cash flow reached -1.3 billion yuan in 3Q24, changing from positive to negative in a single quarter. Among them, revenue decreased by 83 ppt to 0.72 compared to the previous month; the company's capital expenditure was about 1.7 billion yuan, which was relatively low. We believe that the company's cash flow is under pressure or is related to a decline in the profitability of its business. 4) Accounts receivable and inventory turnover days continue to increase. The 3Q24 company's receivables turnover days reached 131 days, +105 days/month-on-month +7 days; inventory turnover days reached 472 days, +256 days/month-on-month +13 days.

What is our biggest difference from the market? The market is more concerned about the progress of the company's semiconductor quartz tubes. We believe that in the short term, the company's core performance will be contributed by photovoltaic grade high-purity sand, and subsequent industry supply may be affected by new overseas and domestic volumes, which in turn will affect product prices and profit margins.

Potential catalysts: Overseas and domestic high-purity quartz sand production is expanding, and PV module installation progress falls short of expectations.

Profit forecasting and valuation

Considering the above factors, we lowered the company's photovoltaic grade high-purity sand shipment volume and price assumption. We lowered 24e/25e EPS 92%/90% to 0.78 yuan/1.03 yuan. The current stock price corresponds to 24e/25e 40x/30xP/E. We downgraded to a neutral rating. Considering that the valuation rotates until 2025, we only lowered the target price by 73% to 33 yuan, corresponding to 24/25e 43x/32x P/E, implying 8% upward space.

risks

Upside risk: PV installed demand is improving; downside risk: the release rate of high-purity sand production capacity exceeds expectations.