3Q23 performance is lower than we expected.

The company announced its results for the third quarter of 2023: 1-3Q23 realized revenue of 2.12 billion yuan, down 25.03% from the same period last year, and net profit from its mother was 237 million yuan, down 16.85% from the same period last year. Net profit from non-return to its mother was 113 million yuan, down 60.68% from the same period last year. Affected by the loss of asset impairment and changes in investment income and other factors, the performance is lower than we expected.

From a quarterly point of view, the company's 1Q/2Q/3Q23 achieved revenue of 9.16%, 635, 569 million yuan respectively, compared with the same period last year,-12.49%, 30.95%, 33.95%, 2.25, 0.16, and 0.04 million yuan, respectively, and + 85.48%, 86.34%, respectively.

Trend of development

Revenue is under pressure during the period of business transition. The company's 1-3Q23 revenue fell 25.03% compared with the same period last year. We believe that on the one hand, the downstream demand of the company's traditional main tobacco label business is weak, on the other hand, the company's strategic transformation of the new materials business, the sale of the subsidiary Hunan Furui, take the initiative to shrink the tobacco label business.

Gross profit margin has fallen. The company's 1-3Q23 gross profit margin is 23.90%, year-on-year-6.71ppt, of which 3Q23 gross profit margin is from-7.22ppt to 20.78% year-on-year. We believe that on the one hand, it is affected by the company's short-term business transformation and adjustment, on the other hand, the new materials business is still in the investment period, and the utilization rate of pre-production capacity is relatively low.

From the cost side, the expense rate for the company's 1-3Q23 period is 17.97%, year-on-year + 2.26ppt, in which the sales / management + R & D / financial expense rate is 2.1%, 15.96% and 0.09%, respectively, and-2.00ppt/+3.94ppt/+0.31ppt, respectively. Company 1-3Q23 net interest rate is 11.2%, year-on-year + 1.1ppt.

Pay attention to the business development of new materials. Recently, the company has changed its name to "Guangdong Dongfeng New Materials Group Co., Ltd.", which demonstrates the company's confidence in transforming the new materials business. at present, Bosheng New Materials, a subsidiary, has achieved mass production and sales of 12-14 μ m three-layer co-extruded diaphragms. Head customers of power batteries and energy storage batteries have been accumulated. In terms of production capacity, the production bases in Loudi, Hunan and Yancheng, Jiangsu Province have steadily promoted capacity expansion plans, and the company expects to increase production capacity by 800 million square meters for the whole year. We expect that with the rapid development of the downstream new energy industry, the company's customer expansion and capacity release, the new materials business is expected to grow rapidly, and with the improvement of capacity utilization, profitability is expected to improve rapidly. it is suggested that we should actively follow the progress of the company's new materials business. In addition, for the consideration of strategic transformation, the company recently announced that it will sell 100% equity in Hunan Furei, a subsidiary, for 306 million yuan. It is suggested that the follow-up attention should be paid to the promotion of the project and its impact on investment income.

Profit forecast and valuation

Taking into account the company's business transformation (not considering the impact of the sale of shares in subsidiaries on investment income), the 24-year income of 23max was reduced by 30%, respectively, to 2.802 billion yuan, and the 24-year return net profit was reduced by 46%, 40%, respectively, to 292. 02 million yuan. The current share price corresponds to the price-to-earnings ratio of 25 times 24-year price-earnings ratio. Maintain the outperform industry rating, adjust the earnings forecast and change the valuation year, but considering the company's strategic transformation of the new materials industry, the future performance growth is stronger, lowering the target price by 4% to 4.80 yuan, corresponding to a 24-year price-to-earnings ratio of 29 times. There is 19% upside space compared to the current stock price.

Risk

Competition in the industry intensified; new capacity climbed less than expected; raw material prices fluctuated sharply.