Description of the event

The company released an interim report: 2023H revenue was about 440 million yuan, up 8% year on year, net profit attributable to about 37 million yuan, down 35% year on year, net profit after deducting non-net profit, down 34% year on year. 2023Q2 revenue was about 200 million yuan, down 5% year on year, net attributable profit was about 24 million yuan, down 21% year on year, and excluding non-net profit, fell 19% year on year.

Incident comments

Revenue growth in the first half of the year came from titanium dioxide. The company's revenue for the first half of the year was about 450 million yuan, of which pearl material revenue was about 360 million yuan, a year-on-year decrease of 11%; titanium dioxide revenue was about 75 million yuan. In the same period last year, titanium dioxide did not contribute revenue. By market, domestic revenue is about 2.9 yuan, up 26% year on year; overseas revenue is about 150 million yuan, down 15% year on year. This means that the increase in titanium dioxide revenue mainly comes from the domestic market, and overseas markets have yet to be developed later. Since the company's titanium dioxide is still in the process of process optimization, large-scale sales have not yet been achieved. Although revenue contributions were made in the first half of the year, the scale was relatively small.

The decline in profit in the first half of the year was due to titanium dioxide, which improved month-on-month in the second quarter. The net profit of Zhengtai New Materials and Fushi New Materials in the first half of the year was -2068 and -7.08 million yuan respectively, with a total loss of 27.76 million yuan. This means that the net profit of the company's original business, pearlescent materials, was about 65 million yuan. If we consider interest expenses of 26.63 million yuan generated from capital expenses for new products, the net profit of pearlescent materials in the first half of the year will be even higher. The company's gross margin for the first half of the year was about 32.4%, down 1.6 percentage points from the previous year. We determined that the gross margin of this business was low due to low production and sales of titanium dioxide in the early stages. In the first half of the year, pearlescent materials benefited from an increase in the share of high-end products and a decline in raw materials, etc., and gross margin increased year-on-year. The rate for the first half of the year was about 20.7%, up 3.0 percentage points from the previous year. Among them, the sales, management, and finance rates increased by 0.4, 1.7, and 1.8 percentage points year on year. In the end, the net interest rate attributable to the first half of the year was about 8.5%, down 5.6 percentage points from the previous year. On a month-on-month basis, the gross margin for the second quarter was about 37.8%, up 9.9 percentage points from the previous month; the rate for the period was about 23.3%, up 4.7 percentage points from the previous month; and the final attributable net interest rate was 12.1%, up 6.6 percentage points from the previous month.

Stable production on a scale requires a long period of optimization, and there is a long way to go. The company's main business has changed over the past few years. The products have extended from pearlescent materials to titanium dioxide, which means entering the mainstream market from the inorganic pigment market segment. The company's core competitiveness lies in the innovative use of hydrochloric acid extraction methods to produce titanium and iron oxides at low cost. This technology is applicable to both pearlescent materials and titanium dioxide. After reviewing its commissioning process, we saw the company's insistence on the path of innovation: the world's first hydrochloric acid extraction titanium dioxide project began in 2018, and trial production of 200,000 tons of titanium dioxide began in August 2019, which is equivalent to small-scale (10,000 to 10,000 tons) mass production of titanium dioxide; in December 2020, trial production of 100,000 tons of titanium dioxide began; trial production of the 100,000 tons of titanium dioxide project began in December 2020, officially launched in the first half of 2022, and then entered the continuous equipment optimization and process adjustment stage.

During the reporting period, the first phase of the titanium dioxide project of Zhengtai New Materials, a wholly-owned subsidiary of the company, operated in an orderly and stable manner. The production process was continuously optimized, production capacity continued to be released, and product quality steadily improved. The second phase of the project to add 600,000 tons of titanium dioxide is under steady construction. After it is put into operation, the company's production capacity for titanium dioxide and iron oxide products will be greatly enhanced.

The company's net profit attributable to 2023-2024 is estimated to be 110 million yuan to 7.1 billion yuan, corresponding to 214.35 times the valuation.

Risk warning

1. Downstream demand for related products has declined sharply;

2. Product performance and customer certification take a long time.