The company's 23H1 performance is growing steadily, has a multi-field layout, gradually enriches the product matrix, and is expected to improve its profitability and resilience to risks. Considering the large drop in the price of silicone products, we adjusted the company's net profit forecast for 2023-2025 to 400, 538, and 696 million yuan, gave the company 20 times PE in 2023, lowered the target price to 14 yuan, and maintained the “buy” rating.

The company's 23H1 performance grew steadily, and Q2 declined slightly from month to month. In the first half of 2023, the company achieved operating income and net profit of 2.08 billion yuan and 220 million yuan, +10% and +23% year-on-year. 23Q1 revenue and net return profit were 1.08 and 120 million yuan respectively, +12% and 35% year-on-year, 23Q2 revenue and net profit at 100 million yuan and 110 million yuan, respectively, +7% and -17%. The company's 23H1 performance grew steadily and maintained a good momentum of development.

Raw material prices are low, and the company's gross margin is expected to increase. According to Zhuochuang, the average price of 23H1 silicone DMC including tax is about 15,700 yuan/ton. We expect that as the production capacity of the silicone industry continues to increase, the DMC price will remain low, which will have a positive effect on recovering the company's gross margin. Currently, the DMC side of the silicone industry is still in a state of loss, and there are expectations that the economy will gradually recover or price increases thereafter. We believe that the company's leading position in photovoltaic silica gel is stable, and that the price of raw materials is currently low. If raw material prices pick up, we expect the company to maintain smooth price transmission capacity and enjoy the dividend of low-price inventory. Overall, the company is expected to achieve an increase in gross margin and rapid growth in performance in 2023.

Production capacity has expanded, and the company's product range has been further diversified. The company currently has a production capacity of about 160,000, 50,000 tons of silicone, polyurethane glue and other adhesives. On the premise of safeguarding the high market share of photovoltaic silica gel, the company laid out lithium battery anode adhesives and electronic adhesives to achieve a diversified layout. Judging from the company's capital expenditure in recent years, the increase in production capacity of silicone silicone is lower than that of polyurethane rubber and other types of rubber. The company's 2021-2023H1 organic silicone revenue accounts for 53.7%, 52.1%, and 52.0%. We expect that with the gradual release of other adhesive production capacity, the company's organic silicone revenue share will gradually decrease, the product structure will be more diversified, and risk resistance will improve.

New products are gradually gaining strength, and high-end products are expected to gradually increase in volume. The company's transparent grid backsheets, lithium battery anode adhesives, and electronic adhesive products are high-end products, and their profitability is superior compared to photovoltaic silica gel. The company's butyl glue, water-blocking adhesive, PUR hot melt adhesive, epoxy bottom filler, UV glue, chip binding adhesive, lithium battery anode adhesive and other products have all achieved technological breakthroughs or market volume. As additional production capacity is gradually released, we believe the company's overall gross margin will further increase.

Risk factors: downstream demand falls short of expectations; raw material prices fluctuate sharply; construction of additional production capacity falls short of expectations; new business development falls short of expectations; the penetration rate of the company's new adhesive products falls short of expectations.

Profit forecast, valuation and rating: Considering the large drop in prices of silicone products, we adjusted the company's net profit forecast for 2023-2025 to 40,000, 5.38 million yuan, and 696 million yuan (the original forecast was 454, 595, and 766 million yuan) of yuan, corresponding to the EPS forecast of 0.71, 0.96 million yuan, and 1.24 yuan. Referring to the valuation level of comparable companies (Silicon Bao Technology, Debon Technology, Zhonglai Co., Ltd., and Saiwu Technology's 2023 Wind unanimously expected average value is 20 times PE), the company's target price was reduced to 14 yuan (the original target price was 21 yuan, the company's share capital increased on May 22, 2023, and the share capital changed due to the conversion of some convertible bonds in 23Q2), and maintained the “buy” rating.