Shenma is a leader in the nylon 66 value chain with technological and scale advantages. The Company's adiponitrile （ADN） project is steadily advancing, and once put into operation, it may remove the limits on raw materials. Meanwhile, the hydrogen-ammonia project and the production capacity expansion for nylon 66 will likely add to its cost and scale advantages. We forecast its 2023E-25E attributable net profit （ANP） to be Rmb152mn/439mn/783mn, equivalent to EPS forecasts of Rmb0.15/0.42/0.75. Based on the average PE and PB multiples of comparable companies, we assign a target price of Rmb9.5 and initiate coverage with a “BUY” rating.

Shenma is a nylon 66 leader, and its earnings may bottom out in 2023.

Shenma is mainly engaged in nylon 66 chips, industrial silk, and curtain fabrics, with downstream applications in the fields of engineering plastics, electronics, and automobiles. According to the Company's 1H23 results, it recorded a loss of Rmb35mn in 1H23. Considering the gradual recovery of downstream demand, we believe that the Company's production, sales, and profits are likely to bottom out, and we are optimistic about the profit recovery in 2H23.

The Company’s ADN project is steadily advancing, which may remove the limits on raw materials.

ADN, a key raw material in the nylon 66 value chain, has long been monopolized by overseas companies, whose production capacity accounts for over 90%. In recent years, China has achieved breakthroughs in import substitution, yet its production capacity is relatively modest and its technological maturity is low. Shenma has successfully completed the pilot test of ADN using independent R&D technologies. According to the Company's announcement, the industrial unit with a capacity of 50ktpa is likely to be put into operation for test runs by the end of 2023. After the commissioning of the project, Shenma may remove the limits on incoming material processing and raw materials utterly controlled by overseas companies, and achieve the integration of the entire nylon 66 value chain. The Company plans to build an AND project with a production capacity of 200ktpa in the long run and achieve complete self-sufficiency in raw materials after the commissioning of the project.

The commissioning of hydrogen-ammonia and ADN projects may reduce costs and enhance profits.

We expect Shenma’s 400ktpa liquid ammonia project and 50,000Nm3/h hydrogen project to operate stably by early 2024, and the self-sufficiency of raw materials may help the Company reduce costs by Rmb90mn per year, with surplus products available for external sales. The coke oven gas and hexanediol projects have been successively put into operation, contributing to earnings. In addition, the partial self-sufficiency of ADN in 2025 is likely to reduce costs by Rmb50mn. In terms of cost reduction, Shenma has been proactively cutting fuel power and multiple expenses to enhance profits. We believe that the production of key raw materials such as ADN, and basic raw　　materials such as liquid ammonia and hydrogen will improve the Company's profits. Meanwhile, the Company's long-term plan of building a 200ktpa ADN project may lead to higher profit margins.

The Company is expanding its business coverage to build a presence in product differentiation.

With the further localization of the ADN and nylon 66 industries, we anticipate that the demand for nylon 66 is likely to further expand, with rapid growth in the fields of civil silk and automobiles. Shenma has also invested in a 20ktpa nylon 66 civilian silk project and the printing and dyeing business, building a presence in differentiated products while expanding market share. At the same time, the Company has completed the pilot test of aramid fibers, with 2ktpa production capacity likely to be unlocked by 2025, demonstrating its technical strength. By building a solid foothold along the entire value chain of nylon 66 while constantly building a presence in differentiated products, the Company has been expanding and improving its business coverage, and thus we are optimistic about its long-term development.

Potential risks: Intensified market competition; slower-than-expected downstream demand recovery; significant fluctuations in raw materials prices; the progress of the Company's new projects missing expectations; the production and debugging operation of the Company’s ADN project not up to expectations; production safety issues.

Investment recommendation: Shenma is a leader in the nylon 66 value chain with technological and scale advantages. The Company's ADN project is steadily advancing, and once put into operation, it may remove the limits on raw materials. Meanwhile, the hydrogen-ammonia project and the production capacity expansion for nylon 66 will likely add to its cost and scale advantages. We forecast its 2023E-25E ANP to be Rmb152mn/439mn/783mn, equivalent to EPS forecasts of Rmb0.15/0.42/0.75. Based on the average PE and PB multiples of comparable companies, we initiate coverage with a “BUY” rating and a target price of Rmb9.5, which implies 23x 2024E PE.