Introduction to this report:

A number of PA and PET projects were delivered and approved, and 24H1's net profit to mother increased 21% year over year. The decline in PA 6/66 raw material prices is expected to drive downstream production expansion, and the company's PA process solutions business can be expected to grow.

Key points of investment:

Maintain an “Overweight” rating. We maintain the company's 2024-2026 net profit forecasts of 0.376, 0.465, and 0.599 billion yuan, respectively, and corresponding EPS of 1.18, 1.46, and 1.88 yuan, respectively.

The release of PA6/66 raw materials is expected to drive the release of downstream PA6/66 production capacity. The company is a leader in complete PA polymerization and spinning technology solutions, and PA 6/66 process solutions can be expected to grow.

Maintain the target price of $28.46 and maintain the “Overweight” rating.

The gross margins of PA and PET process solutions both increased year over year, and performance was in line with expectations. 1) With 2024H1, the company achieved operating income of 0.642 billion yuan, a year-on-year increase of 2%; net profit to mother of 0.173 billion yuan, a year-on-year increase of 21%; net profit after deducting non-attributable net profit of 0.175 billion yuan, a year-on-year increase of 26%. 2024Q2's revenue in a single quarter increased 7% month-on-month, and net profit to mother increased 19% month-on-month. 2) Net operating cash flow was revised to $83.9 million compared to the same period in 2023, and the net increase in cash and cash equivalents increased 81% year-on-year, mainly due to increased sales repayments.

3) The gross margin of the company's process solutions increased year on year. The gross margin of new materials and synthetic material process solutions increased by 2.33% to 44%, and the gross margin of recycled materials and degradable materials industry solutions increased 11.87% to 40% year on year.

China plans to add sufficient production capacity to caprolactam, the raw material for nylon 6. Adinitrile, the raw material for nylon 66, will be released soon, and the drop in raw material prices will drive the release of nylon 6/66 production capacity. 1) Nylon 6:

Caprolactam is planned to increase production capacity by 1.14 million tons in 2023-2024. Downstream leaders are developing a caprolactame/nylon 6 slice/nylon 6 spinning integration and park development model, and nylon 6 production capacity is expected to expand. 2) China's Tianchen Qixiang and Huafeng Group have broken through the localization of adiponitrile. With the implementation of the localized adiponitrile project, the drop in raw material prices is expected to drive the release of downstream nylon 66 production capacity.

Taihua's new recycled nylon material project was delivered, and food-grade recycled PET projects in Japan and South America were inspected. 1) Recycled nylon: The chemically recycled nylon material project signed by the company and Taihua New Materials was successfully delivered in the second quarter of 2024. 2) Regenerated PET: ① The food-grade recycled rPET project signed by the subsidiary Polymetrix and C-PET of Japan was successfully put into operation and completed acceptance, with a contract amount of approximately 0.266 billion yuan. ② Polymetrix has once again completed the delivery of food-grade recycled rPET projects to two Mexican users, ENVASESUNIVERSALES and PETSTAR.

Risk warning: the risk of technology iteration, the level of investment in raw material production capacity falling short of expectations, etc.