1H23 results miss our expectations

Estone Materials Technology （Estone） announced its 1H23 results: Revenue fell 26.43% YoY to Rmb216mn, net profit attributable to shareholders fell 86.05% YoY to Rmb12mn, and net profit attributable to shareholders （excluding the impact of share-based payment expenses） slid 59.37% YoY to Rmb35mn. In 2Q23, revenue fell 22.16% YoY to Rmb110mn （+3.16% QoQ）， and net profit attributable to shareholders was -Rmb1mn. The 1H23 results missed our expectations, which we attribute to weak boehmite sales volume and prices in 1H23, share-based payment expenses, and increased R&D expenses.

Trends to watch

Boehmite shipments edged up QoQ in 2Q23, weighing on profitability. Volume: The firm's sales volume of boehmite rose 2% YoY and 10% QoQ to about 5,500t in 2Q23. Prices: We estimate that the ASP of boehmite fell 10% QoQ to about Rmb16,000/t in 2Q23 as the firm lowered prices in a flexible manner for some clients in 1Q23 in order to further expand market share. Earnings: We believe GM of boehmite has not improved QoQ as ASP fell in 2Q23, capacity utilization rate remained low, and depreciation and fixed cost amortization further eroded earnings per tonne.

Looking ahead, we expect shipment of LiB coating materials to reach 30,000t in 2023 as end-market demand increases in 2H23 and the firm's shipments have gradually improved since June. In terms of prices, we see limited room for further declines and expect boehmite prices to stabilize in 2H23. For earnings, we expect gross margin to gradually recover in 2H23 as capacity utilization rate rises and the effect of new technologies （lower unit consumption and higher productivity） gradually emerges.

Expense ratio increased in 2Q23. In 2Q23, the firm's selling, G&A, R&D, and financial expense ratios were 3.8%, 13.1%, 12.4%, and -0.3%, up 1.7ppt, 5.7ppt, 6.9ppt, and 0.6ppt YoY, mainly due to falling revenue, share-based payment expenses, and increased R&D expenses. In 1H23, the firm's R&D expenses rose by Rmb14.02mn or 95% YoY, and the size of its R&D team expanded from 104 members at the beginning of the year to 116. The team mainly focuses on emerging fields such as solid oxide batteries, thermal conductive powders, nano-carbon fibers, and high- thermal conductive gels for 5G communications.

New products and new production capacity coming online. According to a company announcement, the firm’s 15,000t/yr electronic functional powder material construction project is scheduled to be completed and put into trial production in 4Q23. This project is slated to produce a number of new products such as thermal conductive spherical aluminum, sub-micron high-purity alumina, and low-α spherical alumina for chip packaging. Ceramic silicone rubber-related products were industrialized in 1H23, and new production lines have started trial production in small quantities and sent samples to downstream clients for verification.

Financials and valuation

Given temporary pressure on boehmite sales volume and prices, we lower our 2023 and 2024 net profit forecasts 36% and 38% to Rmb129mn and Rmb230mn. The stock is trading at 41.1x 2023e and 23.1x 2024e P/E. We maintain OUTPERFORM. After considering the downward earnings forecast revision and long-term growth potential created by new products, we cut our target price 20% to Rmb32.00, implying 49.5x 2023e and 27.8x 2024e P/E and offering 20% upside.

Risks

Penetration rate of boehmite coatings disappoints; competition intensifies; development of new products disappoints.