1H24 results are in line with our expectations
The company announced 1H24 results: 1H24 achieved revenue of 3.582 billion yuan (YoY +4.4%, HoH -11.6%); realized net profit of 0.416 billion yuan (YoY -19.5%, HoH -15.9%); realized net profit of 0.431 billion yuan (YoY -10.0%, HoH -9.7%); and the company's 2Q24 gross margin was 28.4% (QoQ+1.2ppt). By sector, battery chemicals/organic fluorine chemicals/capacitor chemicals achieved revenue of 2.293/0.712/0.365 billion yuan (YoY +4.4%/-4.7%/+20.1%) and gross margins of 13.65%/62.22%/40.48% (YOY-2.08/-10.17/+2.14ppt), respectively. The performance was in line with our expectations.
Based on the market environment and changes in the industry, the company expects that the “59,600 tons of lithium battery additive phase I project with an annual output of 59,600 tons” will be delayed by half a year. At the same time, due to the current European NEV policy adjustments, production of some European battery projects has been delayed. Part of the electrolyte construction site of the company's former Xinzhoubang project in the Netherlands was adjusted to the existing factory area in Poland. The planned investment for the current Polish project is no more than 0.2 billion yuan, and plans to build an additional 0.05 million tons/year lithium battery electrolyte.
Development trends
The intergenerational advantages of fluorine-containing fine chemicals still exist. The holding subsidiary of the company, Sanming Hasford, is mainly involved in fluorine-containing fine chemicals downstream of hexafluoropropylene. The company has continuously improved the types of organic fluorochemical products according to the “production generation+development generation+reserve generation” business strategy. The sales structure of 1H24 fluorine fine chemicals has been adjusted, and revenue and gross margin have declined. We believe that the company's fluorine-containing fine chemicals have a first-mover advantage in the semiconductor field. The downstream approval of fluorinated liquid products is high, and it is expected that 3M will be the first to gain some high-end market share in the context of 3M's withdrawal from PFAS products.
The electrolyte project in Poland is progressing well. The company's Polish electrolyte project began trial production in July 2023 and is currently progressing smoothly. We believe that with the release of new production capacity, it is expected to further hedge the profit pressure brought about by the decline in domestic electrolyte prices. According to the company's announcement, Poland's Xinzhoubang signed an electrolyte supply agreement with a famous European battery manufacturer, agreeing that Poland's Xinzhoubang will supply lithium-ion battery electrolyte products to customers from 2024 to 2035. The company is expected to have a positive impact on the company's operating results in the next year. The company expects to cumulatively increase the company's revenue from 2024 to 2035 by about 0.676 billion US dollars. According to the schedule of the agreement, Changxie will have little impact on the 2024 business performance.
Profit forecasting and valuation
Considering the decline in revenue and gross margin of organic fluorochemicals, and the profit pressure on the electrolyte industry, we lowered our 2024/2025 net profit by 21.7%/14.3% to 1.068/1.638 billion yuan. The current stock price trading is 21.8/14.2 times the 2024/2025 price-earnings ratio. Considering the reduction in profit forecasts but the long-term growth of the company remains unchanged, we lowered our target price by 15% to 38.25 yuan/share and maintained a “outperforming industry” rating. The corresponding price-earnings ratio for 2024/2025 was 27.0/17.6 times, respectively. The target price has 24.0% upward space compared to the current stock price.
risks
Competition in the electrolyte industry has intensified, demand for lithium batteries has fallen short of expectations, and the progress of organic fluorine projects has fallen short of expectations.