1H24 results are in line with our expectations

Lianlong announced 1H24 results: revenue of 2.82 billion yuan, up 12.5% year on year; net profit of 0.22 billion yuan to mother, corresponding to profit of 0.96 yuan per share, up 20.5% year on year, in line with our expectations. The year-on-year increase in the company's net profit was mainly due to the increase in production capacity for antioxidants, light stabilizers, and lubricant additives. 1H24 deducted non-net profit of 0.212 billion yuan, up 20.4% year on year; net cash flow from operating activities was 0.122 billion yuan, up 171% year on year. By product, 1H24 anti-oxidant/light stabilizer/u-pack/lubricant additive revenue increased by 13.8%/10.6%/4.95%/26.4% to 8.7/1.02/0.29/0.52 billion yuan, respectively, and gross margin was +3.7pp/+3.8pp/+2.2ppt/-6.6ppt to 19.8%/34.2%/8.6%/8.0%, respectively.

2Q24 achieved revenue of 1.47 billion yuan, up 11.1%/8.2% YoY; net profit to mother was 0.113 billion yuan, up 13.3%/5.5% YoY. 2Q24 gross margin remained flat month/increased 1.9ppt to 21.4% year over year.

Development trends

Kangtai Phase II is in a phase where production capacity is climbing, and sales of lubricant additives are expected to grow rapidly. As of 1H24, the company has a lubricant additive production capacity of 0.133 million tons, a capacity utilization rate of 38.6% in 2023, and a gradual increase in the operating rate of 1H24 Kangtai Phase II. We are optimistic that sales of lubricant additives will continue to grow rapidly. In terms of antioxidants and light stabilizers, the company's new production capacity at its Zhuhai base and Inner Mongolia base is expected to be put into operation in 2024. We believe that as capacity utilization increases, the company's scale effect is expected to continue to increase, help the company maintain its leading position in the industry and wait for downstream demand to pick up to drive profit margins to rise.

Continue to lay out new technologies and materials to open up space for long-term growth. The company established a life science division in 2021 to begin cultivating the third life curve. Furthermore, in 2023, the company indirectly acquired Korean IPI through a capital increase in Yixing Chuangju to lay out the field of high-end electronic grade PI materials. We believe that in the long run, the layout of life science and electronic materials will help enhance the company's continued profitability and build core competitiveness with multiple business curves in parallel.

Profit forecasting and valuation

We keep our profit forecast for 2024/25 unchanged. Currently, the company's stock price corresponds to a price-earnings ratio of 12.1/9.5x 2024/25. Due to the downward shift in the industry's valuation center, we lowered our target price by 15% to 31.7 yuan, corresponding to 39% room for growth and a price-earnings ratio of 16.8/13.2x in 2024/25, to maintain our outperforming industry rating.

risks

Competition for antioxidants, light stabilizers, and lubricant additives has intensified, and the progress of new production capacity investment falls short of expectations.