Matters:

The company released its 23rd annual report, achieving revenue of 12.044 billion yuan in 23, an increase of 9.62% over the previous year; realized net profit of 1,410 billion yuan, a year-on-year decrease of 46.99%; and realized net profit without deduction of 2,414 billion yuan, a year-on-year decrease of 9.40%. Among them, Q4 achieved revenue of 4.06 billion yuan in a single quarter, an increase of 52.18% over the previous year; realized net profit of 96 million yuan, a year-on-year decrease of 130.46%; realized net profit deducted from non-mother of 876 million yuan, an increase of 157.10% over the previous year. The large amount of non-recurring profit and loss was mainly due to estimated liabilities of 964 million yuan for the subsidiary Mengda Mining litigation matters.

The company plans to pay a cash dividend of RMB 0.3 (tax included) per share, with a total distribution profit of approximately RMB 1,119 million, accounting for 79.36% of net profit returned to mother in '23. The dividend ratio is 4.79% based on the closing price on April 15, 2024.

At the same time, the company released its quarterly report for the year 24. 24Q1 achieved revenue of 3.280 billion yuan, an increase of 31.03% over the previous year, and realized net profit of 569 million yuan, a year-on-year decrease of 12.70%.

Commentary:

The scale of production and sales of main products has been growing steadily, and the soda ash boom remains relatively high. Judging from the operating data of various products: soda ash: production of 2.69 million tons in 23 years, +74% year over year; sales volume of 2.57 million tons, +59% year over year; average annual sales price of 2,091 yuan/ton, -8%; achieved a gross profit margin of 59.6% for the whole year, +1.9 pct year on year, maintaining a high level of prosperity throughout the year. Baking soda: Production in 23 years was 1.18 million tons, +3% year over year; sales volume 1.2 million tons, +4% year over year; average annual sales price was 1,058 yuan/ton, -26% year over year; achieved gross profit margin of 43.1%, -9.5 pct year on year, mainly due to the sharp drop in 23Q2 baking soda prices, which affected product profits. Urea: Yearly production of 1.67 million tons, +4% year over year; sales volume of 1.81 million tons, +16% year over year; average annual sales price of 2,111 yuan/ton, -13% year over year; achieved gross profit margin of 24.6% for the whole year, -5.0 PCT year on year. Judging from the operating conditions of major subsidiaries and joint ventures: Zhongyuan Chemical (holding 81.71% of the shares, soda soda): achieved net profit of 1,558 billion yuan in 23 years, a year-on-year decrease of about 656 million yuan, mainly due to falling soda ash and baking soda prices, which weakened profits. Yingen Mining (60% shareholding, soda soda): Achieved net profit of 767 million yuan in '23, a sharp reversal of losses over the previous year, mainly due to the steady release of soda ash and baking soda production capacity in Alashan. Mengda Mining (34% shareholding, coal): Achieved net profit of 1,652 billion yuan in '23, a year-on-year decrease of 1,151 billion yuan. Mainly affected by rising coal costs and falling prices, profits continued to decline. Currently, Mengda Mining has executed the transfer of prospecting rights at a low price with a price difference of 2,223 billion yuan, and confirmation of the ratio between the company and China Coal Energy is still in the arbitration process.

Alashan's natural alkali production capacity has been steadily released, creating a core competitive advantage in cost+production capacity. The construction of the company's Yingen Mining Alashantamycin natural alkali project is progressing steadily. The first phase of the 5 million ton soda ash project has reached production, and line 4 is in the process of testing. According to estimates of the soda ash production capacity of the 1-3 lines totaling 4 million tons, we expect that the soda ash production of the alkali project will contribute more than 1 million tons in 2023 and continue to decline on the cost side. The unit cost of soda ash has dropped to 808 yuan in 23, down about 197 yuan/ton from '22. Among them, unit material, unit labor, and unit manufacturing costs have decreased by 222, 6, and 15 yuan/ton, respectively. With the next 4 lines of production, the company's soda ash costs are expected to drop.

Currently, construction of the Yingen Mining Phase II 2.8 million ton soda ash project began at the end of 2023, and preliminary work such as engineering design, site exploration, ordering of some long-term equipment, and project commencement procedures has been carried out. It is scheduled to be completed by the end of 2025. Looking to the future, the operation of the alkali alkali project is expected to reshape the competitive pattern of the industry. The company's soda ash market share is expected to further increase from 15% in 23 to 22% in '26, and is expected to build a strong moat with production capacity and cost advantages, opening up room for long-term growth.

Investment suggestion: Considering the subsequent downward pressure on soda ash prices and the release of the company's production capacity, we lowered the company's net profit forecast for 24-25 to 26.36 billion yuan and 2,936 billion yuan respectively, corresponding EPS to 0.71 and 0.79 yuan (previously 0.75 and 0.80 yuan), and added a 26-year net profit forecast of 3,518 billion yuan, corresponding to EPS of 0.94 yuan. The PE corresponding to the current market value is 9x, 8x, and 7x, respectively. Considering that the company's production capacity and cost advantages are expected to be gradually realized starting in '24, the company is expected to receive a valuation premium at the bottom of the cycle of leading companies. We gave the company 12 times PE in 2024, corresponding to a target price of 8.52 yuan, maintaining a “strong” rating.