Incidents:

On April 23, 2024, China Catalyst released its 2023 annual report: in 2023, the company achieved operating income of 550 million yuan, a year-on-year decrease of 19.21%; realized net profit of 0.77 million yuan, a year-on-year decrease of 49.34%; realized net profit after deduction of 54 million yuan, a year-on-year decrease of 58.11%; gross sales margin of 32.83%, a year-on-year decrease of 6.81 pcts, a year-on-year decrease of 8.31 pcts; at the end of 2023, the company's inventory amount was 3.46 million yuan 100 million yuan, up 7.07% year on year; the company's net cash flow from operating activities in 2023 was 107 million yuan, up 100.31% year on year.

2023Q4 In a single quarter, the company achieved operating income of 186 million yuan, -3 1.85% YoY, +45.79%; realized net profit of 34 million yuan, -48.57% YoY, +728.22% month-on-month; net profit after deduction of 16 million yuan, -71.90% YoY, +335.20% month-on-month; gross sales margin was 21.91%, -15.33 pcts YoY, -9.63 pcts month-on-month; Net sales margin was 18.13%, YoY -5.88 pcts, month-on-month + 14.94 pcts; at the end of the 2023Q4 quarter, the company's inventory amount was 346 million yuan, +7.07% year over month, -7.11% month on month; net cash flow from operating activities was 36 million yuan, -58.57% year over year, positive month on month.

In a single quarter of 2024Q1, the company achieved operating income of 199 million yuan, +61.19% year over month; realized net profit of 35 million yuan, +1610.19% year on month, +4.26% month on month; net profit without net return to mother was 34 million yuan, +2690.02% year on year, +119.87% month on month; gross sales margin was 37.61%, +5.97 pcts month on month; net sales margin was 17.63%, year on year +15.97 pcts, month on month, Compared to -0.50 pct; at the end of the 2024Q1 quarter, the company's inventory amount was 323 million yuan, -6.56% year-on-year, -6.53% month-on-month; net cash flow from operating activities was -20 million yuan, which turned negative month-on-month.

Investment highlights:

Downstream demand gradually recovered, and the company's strong year-on-year performance in the first quarter of 2024 was affected by market demand falling short of expectations and a decrease in customer orders, and the company's 2023 performance was under pressure.

In 2023, the company achieved revenue of 550 million yuan, a year-on-year decrease of 19.21%. By product sector, the special molecular sieve and catalyst series achieved revenue of 439 million yuan, a gross margin of 32.62%, year-on-year -6.61 pcts, sales volume of 2848.24 tons, or -30.83%; non-molecular sieve catalyst series achieved revenue of 81 million yuan, +280.39% year-on-year, gross profit margin 15.93%, year-on-year -1.20 pcts; sales volume of 393.00 tons, year-on-year, +8.26%; technical services achieved revenue of 0.25 million yuan, +75.44% year-on-year.

In 2023, the company achieved net profit of 77 million yuan, a year-on-year decrease of 49.34%, mainly due to falling market demand, a decline in the company's capacity utilization rate, and an increase in the company's equity incentive expenses in 2023. In 2023, the company's sales expense ratio was 1.83%, the same year on year; the management expense ratio was 11.63%, +3.39 pcts year on year, mainly due to the increase in share payment expenses due to the company's implementation of equity incentives; the R&D expense ratio was 8.64%, +1.36 pcts year over year, mainly due to the reduction in material costs and service fees for the company's R&D projects; the financial expense ratio was -1.14%, -0.37 pcts year on year, mainly due to a decrease in interest on company loans.

At the end of 2023, the company's inventory value was 346 million yuan, up 7.07% year on year. The company's net cash flow from operating activities in 2023 was $107 million, an increase of 100.31% year-on-year, mainly due to increased sales repayments.

In the Q1 quarter of 2024, benefiting from a sharp increase in downstream procurement volume, the company achieved revenue of 199 million yuan, +61.19%, and +7.22% month-on-month; realized net profit of 35 million yuan, +1610.19%, +4.26% month-on-month; gross sales margin was 37.61%, +5.97 pcts year-on-year, +15.70 pcts month-on-month, mainly due to the increase in sales price of the company's main products; sales expense ratio 0.95%, -0.84 pcts year on month, -1.01 pct month on month; The cost rate was 6.66%, -8.46 pcts year-on-year, and -0.06 pcts month-on-month, mainly benefiting from the company's refined management; R&D expenses rate 5.79%, year-on-year -4.70 pcts, month-on-month +0.81 pcts; financial cost ratio -1.95%, year-on-year -3.28 pcts, and -1.56 pcts month-on-month.

Consolidate main business and optimize product structure

The company's main products include special molecular sieves, non-molecular sieve catalysts and catalytic application processes and chemical technology services. In the environmental protection industry, the company's CHA structural mobile source denitrification molecular sieve process is mature, the quality is stable, and it has large-scale industrial production capacity, and has been supplying internationally renowned chemical companies such as BASF and Xixing for a long time; in the field of energy, chemical and fine chemicals, the company's propane oxide catalysts and pyridine synthesis catalysts have replaced imported products among some customers, and petroleum cracking molecular sieves have been supplied to BASF. The company's non-molecular sieve catalysts are mainly HDC catalysts, which are used to prepare glyphosate catalysts. In addition, the company has mastered the core process technology for various chemical products, including production process packages for HPPO propylene oxide, butanone oxime, methoxyacetone, etc. The company always insists on innovative research and development to enhance the core competitiveness of products. In 2023, the company's R&D expenses are about 48 million yuan. By the end of 2023, the company and its wholly-owned subsidiaries had obtained a total of 221 authorized patents. At the same time, the company actively lays out various environmentally friendly catalyst products such as TRH special molecular sieves, VOCs purification catalysts, and ethylene glycol synthesis catalysts.

The fund-raising project is progressing smoothly, and production capacity is gradually being released

On April 23, 2024, the company disclosed the progress of the fund-raising project. Up to now, the company has two projects under construction: a special molecular sieve, an environmentally friendly catalyst, an industrialization project for automobile exhaust purification catalysts, and a project for new environmentally friendly materials and intermediates. Among them, the project of 3,000 tons of special molecular sieves, environmentally friendly catalysts, and 1,000 tons of automobile exhaust purification catalysts is expected to be completed by the end of 2023. On March 21, 2024, the company's new environmentally friendly materials and intermediates project completed the preliminary procedures required for project construction. The main products of the project include 3,300 tons of special molecular sieves and catalysts, 3,200 tons of non-molecular sieve catalysts, and 10,000 tons of fine chemicals. As the production capacity of the fund-raising project is implemented, the company's product matrix is further enriched, and the company's business is expected to grow at an accelerated pace.

Profit forecasts and investment ratings estimate that the company's revenue for 2024-2026 will be $9.11, 12.16, and 1,576 million yuan, respectively, and net profit to mother of 1.45, 2.32, and 347 million yuan, respectively, corresponding to PE 24.83, 15.57, and 10.40 times, respectively. As a leading domestic catalyst enterprise, the company's main business is stable, and production capacity for fund-raising projects is gradually being released. The company is expected to increase its market share year by year, grow rapidly, and achieve import substitution. First coverage, giving a “buy” rating.

Risks suggest that market development falls short of expectations; risk of raw material price fluctuations; new product development falls short of expectations; industry competition pattern deteriorates; risk of falling product prices; domestic substitution process falls short of expectations; risk of exchange rate fluctuations.