Introduction to this report:

Slicing, adipic acid, etc. are at the bottom of the boom, and the company's profits are under pressure. The company focuses on the main business and actively breaks through the upstream and downstream industrial chains.

The company is laying out raw materials such as adiponitrile, hydrogen ammonia, and aminohexanitrile, and has joined hands to enter the PA66 civilian field.

Key points of investment:

Maintain an “Overweight” rating. Affected by the decline in industry sentiment, the company's 24-26 EPS was reduced to 0.05/0.26/0.32 yuan (previously 0.26/0.39/0.49 yuan). Referring to comparable companies, considering that the company is a leader in the nylon 66 industry, the company was given 30 times PE and 1.37 times PB in 25 years, and the company's target price was raised to 9.25 yuan (originally 7.80 yuan).

The industry is booming, and the company's performance is under pressure. The company announced that the company's total revenue for the first three quarters of 2024 was 10.206 billion yuan, up 8.21% year on year, and net profit to mother was 26.6721 million yuan, down 62.09% year on year. Among them, total revenue for the third quarter was 3.236 billion yuan, a year-on-year decrease of 2.89%, and net profit to mother for the third quarter was -27.6957 million yuan, which turned into a loss over the same period last year. In the first three quarters, the company's main products were at the bottom of the boom. Among them, nylon 66 industrial wire/ nylon 66 slices/nylon 6 slices/nylon 6 slices// adipic acid and other varieties without tax were 24605/29180/16825/12245/7736 yuan/ton, respectively, -6.63%/-8.15%/-2.52%/-2.64%/-5.00%, month-on-month ratio, -4.66%/-4.73%/-8.64%.

The company's profitability declined, with gross margin/net profit margin of 9.93%/-0.81% in 24Q3, -0.66pct year-on-year and -1.95/-1.90pct, respectively.

Lay out the upstream and downstream industrial chains and expand the PA66 civilian sector. In terms of the industrial chain layout, the company's self-built hydrogen ammonia project has been put into operation, and the 0.05 million ton adiponitrile project is progressing in an orderly manner. In the future, it will achieve self-sufficiency as a key raw material, adiponitrile. The company's controlling shareholder's 0.02 million ton aminohexanitrile project has been put into operation, 0.1 million tons of production capacity has been built to develop downstream caprolactam products and a new process route for caprolactam to make hexanediamine. The downstream civilian sector is actively expanding. The company cooperated with Yili to establish a company in Pingdingshan, and also acquired 25% of each shares of Yilijin and Yili Plastics, and increased capital from Yili Nylon to enter the nylon 66 civil yarn field. The company plans to build a 0.02 million ton/year nylon differentiated fiber project in Thailand to meet and expand the development needs of the tire manufacturing industry in Southeast Asia and North America.

Equity incentives highlight the company's confidence in development. On September 25, Shenma Co., Ltd. announced the 2024 restricted stock incentive plan (draft). The company plans to grant 10.244 million restricted shares in one go to 222 incentive recipients, accounting for about 0.98% of the company's total share capital on September 20. The price of shares granted under this incentive plan is 3.8 yuan/share. The assessment goals are clear. Based on the total profit in 2023, the total profit growth rate in 2025 is not less than 60%, the total profit growth rate in 2026 is not less than 100%, and the total profit growth rate in 2027 is not less than 150%.

Risk warning: raw material prices fluctuate; projects under construction are postponed; demand for nylon 66 falls.