Description of the event

In 2020, revenue was 750 million yuan, an increase of 22% over the previous year, and net profit attributable was 160 million yuan, an increase of 7% over the previous year. The first quarter of 2021 achieved revenue of 210 million yuan, an increase of 29% over the previous year, and net profit attributable to it was 44 million yuan, an increase of 25% over the previous year.

Incident comments

Revenue bucked the trend and profitability declined. The company's revenue increased 21% in 2020. We determine that it was mainly due to an increase in sales volume. The decline in average price was mainly due to an increase in Merle's brand share; the company's revenue increased 29% year-on-year in the first quarter, which was still due to rapid growth in sales. Excluding the net profit impact of Fuji & Zhengtai New Materials (-09 billion yuan), the net profit of the main business in 2020 was about 170 million yuan, an increase of 13% over the previous year. We determined that performance growth was lower than revenue growth, mainly due to an increase in the share of Merle brands with weak profitability. Judging from the first quarter, the impact of the company's product restructuring on profitability had weakened, and performance growth gradually matched revenue growth.

There has been an improvement in gross margin. The company's comparable gross profit margin for the full year of 2020 was 41.3%, down 3.3 percentage points from the previous year, mainly due to a significant increase in Merle brand sales; the rate for the period was 16.6%, down 0.6 percentage points from the previous year. Among them, sales, management, R&D, and finance rates changed by -2.3, 0.1, 0.3, and 1.3 percentage points respectively.

The company's gross profit margin for the first quarter of 2021 was 40.5%, down 1.0 percentage point from the previous year. Taking into account the adjustment of accounting standards, the actual gross margin was higher; the period rate was 15.9%, up 0.9 percentage points from the previous year. Among them, the sales rate was not comparable, and the management, R&D, and finance rates changed -0.4, 1.3, and 1.7 percentage points respectively.

After the new project was put into operation, it climbed smoothly. As of 2021/Q1, the company is currently constructing about 500 million yuan of projects and intangible assets of about 270 million yuan (continuous land purchases in 2019-2020, with a cumulative total of close to 200 million yuan). In addition to the initial investment amount of the Fuji factory (which was consolidated in 2019, about 200 million yuan), the total investment amount for new projects is currently about 900 million yuan. According to annual report data, the company's 200,000 ton titanium dioxide production line is still climbing. It plans to officially start operation in May 2021, and plans to build 500,000 tons of titanium dioxide and 400,000 tons of iron trioxide projects in 2021.

The Fujifilm and Zhengtai projects are yet to be profitable. In 2020, Fujifilm and Zhengtai New Materials achieved net profit of about -6.35 million yuan and -2.88 million yuan respectively. The semi-annual report achieved net profit of about 5.75 million yuan and -180,000 yuan respectively. Therefore, the total net profit for the second half of the year was about 3.3 million yuan, and profitability gradually improved. By the end of 2020, the number of employees in the company was about 653, of which the parent company and subsidiary companies (mainly Fuji and Zhengtai factories) had about 435 and 218 employees respectively.

Compared to 2019 (the number of employees in the company was about 521, of which the parent company and subsidiary had 420 and 101 employees respectively), the overall number of employees increased by 25%. Among them, the number of employees in the parent company increased by 4%, and the number of employees in the subsidiary increased by more than 100%. Titanium dioxide has yet to achieve revenue in the first quarter, but operating costs and expenses have already increased. As large-scale sales begin next, it is expected that the Fuji and Zhengtai projects will gradually become profitable.

It is estimated that the company's net profit for 2021-2022 will be about 4.0 (corresponding to 200 million yuan of pearlescent materials plus 2 billion yuan of titanium dioxide) and 740 to 1.53 billion yuan, corresponding to 49, 27, and 13 times the valuation. I will continue to recommend it.

Risk warning

1. There has been a sharp decline in the global economy;

2. The progress of putting the new project into operation fell short of expectations.