Event: On April 19, 2024, Zhejiang Longsheng released its 2023 annual report. The company's revenue in 2023 was 15.303 billion yuan, down 27.90% year on year; net profit to mother was 1,534 billion yuan, down 48.92% year on year; deducted non-net profit was 1,629 billion yuan, down 40.97% year on year. The corresponding company's 4Q23 revenue was 4.473 billion yuan, up 23.88% month-on-month; net profit to mother was 634 million yuan, up 491.66% month-on-month.
Comment: The volume and price of dyes have both declined, and the company's performance is under pressure in the short term. According to the company's 2023 annual report, the revenue of the dye/intermediates/real estate business/inorganic products/additives/auto parts/color standards and sustainable development solutions service segment in 2023 was 75.21/31.38/13.26/12.58/9.31/5.11/127 million yuan respectively, YoY was -13.28/-21.04/-70.52/-25.09/-6.89/-32.37/ 12.89%, respectively, gross margins were 27.84%/32.01%/ 30.29%/10.67%/23.75%/4.89%/47.16%, year-on-year change -4.07/-14.55/6.07/-2.88/0.06/-2.04/8.93pcts.
In terms of production and sales volume, the company's sales volume in the dye sector in 2023 was 222,500 tons, down 2.03% year on year; sales volume in the additives sector was 56,400 tons, down 8.05% year on year; sales volume in the intermediate sector was 911,000 tons, up 3.66% year on year; and sales volume in the inorganic products sector was 897,200 tons, down 7.76% year on year. Sales volume and prices in the company's dye sector have both declined, putting pressure on the company's short-term performance.
The company's sales expenses fell 11.32% year on year, mainly due to a decrease in commissions, storage, transportation and miscellaneous expenses, etc. from the current sales period. The sales expenses rate was 3.92%, up 0.73 pcts year on year; financial expenses decreased by 231.90% year on year, mainly due to the increase in interest income and exchange income in the current period. The financial expenses ratio was -0.66%, down 1.02 pcts year on year; management expenses decreased 9.47% year on year, mainly due to a decrease in employee remuneration, travel expenses, and business hospitality expenses in the current period. The management expenses rate was 5.12%, up year on year 1.04pcts; R&D expenses decreased by 18.17% year on year, mainly due to a decrease in R&D materials and energy investment and employee remuneration. The R&D cost rate was 3.79%, up 0.45 pcts year on year.
Cash flow from the company's operating activities fluctuates greatly. The net cash flow from the company's operating activities in 2023 was $2,751 billion, up 187.79% year on year; net cash flow from investment activities was -1,938 million yuan, down 28.01% year on year; net cash flow from financing activities was 374 million yuan, down 2.81% year on year; and the balance of cash and equivalent at the end of the period was 7.749 billion yuan, up 19.71% year on year.
Accounts receivable fell 13.72% year over year, and the accounts receivable turnover decreased from 9.05 times to 7.23 times; inventory increased 2.35% year over year, and inventory turnover decreased from 0.52 to 0.39 times.
Downstream demand in the dye industry is recovering weakly, and product prices are still at the bottom. The company is expected to develop in the recovery with advantages of scale and integration. On the demand side, according to data from the National Bureau of Statistics, the printing and dyeing cloth production of enterprises above the size of the printing and dyeing industry increased by 1.30% year-on-year in 2023, and downstream demand gradually improved. On the supply side, competition within the dye industry is gradually intensifying, product prices are gradually bottoming out, and the level of profit within the industry is still at a historically low level. The company has an obvious leading position in the dye industry. According to the company's 2023 annual report, the company has an annual production capacity of 300,000 tons of dyes and an annual production capacity of about 100,000 tons of additives, ranking first in the global market. The company promotes the expansion of the industrial chain and actively lays out key upstream intermediates. Integrated production makes the company's products have a certain cost advantage. At the same time, the company's control of key intermediates has also played a role in making contracts with peers. According to the company's 2023 annual report, the company has an annual intermediate production capacity of 119,500 tons, and the production of mesophenylenediamine and resorcinol are among the highest in the world. We believe that dye prices are currently at the bottom, and the company is expected to develop with the advantages of scale and integration as the industry recovers.
The company continues to lay out the intermediates and dye business to expand its competitive advantage. According to the company's 2023 annual report, the production capacity of the first phase of the company's 20,000 tons of H acid project has entered the trial production stage; the first phase of the 9,000-ton aminophenol project has already been put into operation, and the leading position in the dye intermediates industry has been further stabilized. In terms of dyes, the anthraquinone dye project with an annual output of 9,000 tons has already been partially put into operation. We are optimistic that the company will continue to increase its dye and intermediate business, and it is expected that its competitive advantage will be further highlighted.
In terms of real estate business, the company's project construction is expected to generate future revenue. According to the company's 2023 annual report, the Huaxing Xincheng project solved the difficulties of deep foundation pit construction by optimizing the construction organization, completed the foundation of the 320-meter main tower office building and construction to the first floor, and completed the 150-meter super-high-rise residential project schedule. Wanshang Huiguan opened to collect customers. The case name “Bomao Plaza” was released to the public, presenting high-quality residential model houses. We are optimistic about the progress of the company's real estate projects and are expected to contribute to future results.
Investment advice: We expect Zhejiang Longsheng's revenue for 2024-2026 to be 185.97/209.57/22.615 billion yuan, up 21.52%/12.69%/7.91% year on year, net profit to mother of 19.06/23.15/2.57 billion yuan respectively, up 24.25%/21.47%/11.01% year on year, corresponding EPS 0.59/0.71/0.79 yuan respectively. Combined with the company's closing price on April 24, the corresponding PE was 15/13/11 times, respectively. We are based on the following three aspects: 1) We believe that dye prices are currently at the bottom, and the company is expected to develop with the advantages of scale and integration as the industry recovers. 2) We are optimistic about the company's continued expansion in the dye and intermediate business, and it is expected that its competitive advantage will be further highlighted. 3) We are optimistic about the progress of the company's real estate projects. We expect to contribute to future performance increments and maintain the “gain” rating.
Risk warning: risk of fluctuating upstream raw material prices, risk of increased environmental requirements, exchange risk, risk of increased industry competition, risk of downstream demand falling short of expectations