Incident 1: On April 14, 2023, Zhejiang Longsheng released its 2022 annual report. The company's total revenue in 2022 was 21,226 billion yuan, up 27.41% year on year; Guimu's net profit was 3003 billion yuan, down 10.99% year on year; net profit after deducting non-net profit was 2,759 billion yuan, up 16.59% year on year. The total operating revenue of the corresponding company in 22Q4 was 7.803 billion yuan, up 79.49% from the previous month; the net profit of the parent company was 1,278 million yuan, up 325.32% from the previous month.

Incident 2: On April 27, 2023, Zhejiang Longsheng released the first quarter report of 2023. The company's total revenue for 1Q23 was 3.749 billion yuan, down 16.80% from the previous year and 51.96% from the previous month; Guimu's net profit was 344 million yuan, down 26.81% year on year and 73.11% month on month.

Revenue from the real estate business was confirmed, driving the company's overall revenue growth in 2022. The company's revenue from the dye/intermediate/real estate business segment in 2022 was 86.73/39.75/4.498 billion yuan respectively, YoY was -1.84%/1.30%/2644.79% respectively, and gross margin was 31.91%/46.57%/24.22% respectively, compared to -0.61/-4.80/+0.81 pcts respectively over the previous year. The increase in the company's revenue is mainly related to the pre-sale of the Longsheng Fuxinli project in the company's real estate business segment in 2021 and revenue confirmation in 2022. Sales expenses increased 10.38% year-on-year, due to an increase in commissions, warehousing, freight, and miscellaneous expenses incurred from sales in the current period. The sales expense ratio was 3.19%, a year-on-year decrease of 0.49 pcts; management expenses fell 6.93% year-on-year, due to a decrease in employee remuneration, office expenses, business hospitality expenses, etc. in the current period. The management expenses rate was 4.08%, a decrease of 1.51 pcts over the previous year; financial expenses fell 68.43% year-on-year, due to a decrease in interest expenses due to falling financing costs, and an increase in deposit interest income and exchange income at the same time. The financial expenses ratio was 0.36%. The year-on-year decrease was 1.10 pcts; the year-on-year increase in R&D expenses was 8.72% due to the increase in R&D materials and energy input and other expenses in the current period. The R&D cost rate was 3.34%, a year-on-year decrease of 0.58 pcts. The company's net profit to the parent declined in 2022. The net interest rate was 15.67%, a year-on-year decrease of 6.99 pcts.

The company's overall cash flow situation was stable in 2022, and the net cash flow generated by various activities varied greatly. Net cash flow from operating activities was 996 million yuan, a year-on-year decrease of 79.58%, due to a decrease in pre-sale payments for real estate; net cash flow from investment activities was -1,514 million yuan, up 45.50% year on year, due to a decrease in foreign investment payments; net cash flow from fund-raising activities was 385 million yuan, up 131.22% year on year, due to a decrease in bank loan repayments over the same period last year. The balance of cash and cash equivalents at the end of the period was $6.473 billion, with little change from year to year. Accounts receivable fell 6.00% year over year, and the accounts receivable turnover ratio increased from 7.14 times at the end of 2021 to 9.05 times. Inventory increased 1.45% year over year. There was little change. The inventory turnover rate increased slightly, from 0.42 times at the end of 2021 to 0.52 times.

The company's gross margin and net interest rate both declined year-on-year in the first quarter of 2023. The company's gross margins and net profit margins for 1Q23 were 26.73%/10.25% respectively, and -3.39/-1.83 pcts respectively over the previous year. Sales expenses fell 3.15% year on year, sales expense ratio was 4.22%, up 0.59 pcts year on year; management expenses increased 2.33% year on year, management expenses were 5.36%, up 1.00 pcts year on year; financial expenses rose 33.23% year on year, mainly due to the increase in exchange losses in the current period compared to the same period last year. The financial expense ratio was 2.72%, up 1.02 pcts year on year; R&D expenses fell 15.18% year on year, R&D expenses rate was 3.91%, up 0.07 pcts year on year. Net cash flow from operating activities was 1,521 billion yuan, an increase of 623.97% over the previous year, mainly due to higher advance receipts from real estate sales received in the current period; net cash flow from investment activities was 337,900 yuan, an increase of 100.57% over the previous year; net cash flow from fund-raising activities was 1,690 million yuan, an increase of 1224.67% over the previous year, mainly due to a large increase in long-term loans in the current period. Inventories fell 0.32% year over year, and the inventory turnover rate changed from 0.11 times in the first quarter of 2022 to 0.10 times year on year.

Accounts receivable fell 6.47% year over year, and the accounts receivable turnover ratio changed 1.48 times year over year from 1.67 times in the first quarter of 2022.

Downstream demand for printed and dyed cloth was still insufficient in 2022. Printing and dyeing production declined year-on-year, insufficient demand for dyes compounded by increased supply, and the company's dye business was under pressure. According to the China Printing and Dyeing Industry Association1, from January to December 2022, enterprises above the size of the printing and dyeing industry produced 55.622 billion meters of printed and dyed cloth, a year-on-year decrease of 7.52%. Looking at the whole year, in the first quarter, the production situation in the industry was basically good, and the production of printed and dyed cloth maintained positive growth. Beginning in the second quarter, factors such as the intensification of the Russian-Ukrainian conflict, the acceleration of monetary policy tightening between Europe and the US, and the frequent occurrence of domestic epidemics had a major impact on the terminal consumer market. The growth rate of printed and dyed cloth production declined quarter by quarter. Insufficient aggregate demand is a prominent problem facing production in the printing and dyeing industry. The decline in printing and dyeing cloth production has led to insufficient demand for dyes. In 2022, the company's dye business was affected by large fluctuations in raw material prices, and energy prices continued to be high. At the same time, the triple pressure of shrinking demand, increasing supply, and weakening expectations continued to be affected, and revenue scale and gross margin declined. Despite this, the company remains profitable thanks to its leading position in the industry. The company currently has a dye production capacity of 300,000 tons/year, and the production capacity under construction includes an anthraquinone dye project with an annual output of 9,000 tons. The company sold 227,700 tons of dyes in 2022.

Among them, production and sales of disperse dyes reached a record high. The implementation of a full-process upgrade project for disperse dyes, a series of key technologies for treating high-salt high-COD wastewater, and the development of new green cleaning technology for dye supporting intermediate projects have greatly reduced production costs, effectively enhanced the core competitiveness of the disperse dye business in the market, and further consolidated the company's leading position in the dye industry. The company leads international and domestic peers in size, services, brands, channels, costs, and innovation capabilities. We believe that short-term dye prices are at the bottom, and dye price recovery still needs to wait for the industry to recover.

The intermediates business maintains its leading position while building a moat for the dye business. The company has an annual production capacity of 114,500 tons of intermediates. The production capacity under construction includes a project with an annual output of 20,000 tons of H acid and a project with an annual output of 9,000 tons of aminophenol. The industry where the company's intermediate products are located is relatively stable. The market competition pattern has not changed significantly. The production and sales volume of the company's intermediate products has increased by a certain margin compared to the previous year. With the completion and operation of large-scale meth production equipment and continuous improvement of production technology and process, production costs have gradually declined, and scale advantages and cost advantages have made the company the global industry leader for meth. At the same time, the company is actively expanding the production and expansion of other intermediates such as resorcinol, hydroquinone and metaminophenol, which has contributed to consolidating the company's dye business position in the industry. We believe that the company has achieved upstream and downstream expansion of the entire dye industry chain, self-supporting key intermediates, and enhancing the company's dominance in the dye industry. The company's dye products have advantages such as brand and cost. It is expected that the company's dye market share will continue to expand in an increasingly fierce competitive environment, further consolidating its leading position in the industry.

Realization of income from the real estate business. The company's real estate business revenue increased 2644.79% year-on-year in 2022, mainly related to the pre-sale of the Longsheng Fuxinli project in 2021 and confirmed revenue in 2022. The company steadily promoted the gradual implementation of the project. On the basis of the successful commencement of construction at the beginning of the year, the Huaxing New Town project in Shanghai completed the pile foundation and enclosure project and started the basement construction. The Longsheng Fuxinli project strictly implemented all the work at the end of the project, completed high-rise residential delivery targets to a high standard, left a good reputation among peers and owners, and initially established the market's trust in the Longsheng brand and quality. We believe that the real estate business Huaxing Xincheng Project has entered the construction period and is expected to be converted into revenue in the next few years.

Investment proposal: It is estimated that the company will achieve operating income of 18992/202.59/22,530 billion yuan respectively in 2023-2025, and the net profit returned to the mother is 29.14/3317/3,968 billion yuan respectively. The corresponding EPS is 0.90/1.02/1.22 respectively. The PE multiples corresponding to the current stock price are 12X, 11X, and 9X respectively. We believe that short-term dye prices are at the bottom, and dye price recovery still needs to wait for the industry to recover. The company has achieved upstream and downstream expansion of the entire dye industry chain, self-supporting key intermediates, and enhancing the company's dominance in the dye industry. The company's dye products have advantages such as brand and cost. It is expected that the dye market share will continue to expand in an increasingly fierce competitive environment, further consolidating its leading position in the industry. The first coverage gave an “increase in holdings” rating.

Risk warning: demand for dyes fell short of expectations; dye/intermediate production capacity expanded dramatically; industry competition intensified; risk of fluctuations in raw material prices; real estate policy risks, safety risks, environmental risks.