1H24 results in line with our expectationChanghai Composite Materials (Changhai) announced its 1H24 results: Revenue fell 6% YoY to Rmb1.22bn; attributable net profit fell 42% YoY to Rmb122mn; and recurring attributable net profit dropped 40% to Rmb117mn. In 2Q24, revenue fell 9% YoY to Rmb643mn and attributable net profit fell 45% YoY to Rmb71mn. The firm's results are largely in line with our expectations.

Trends to watch

Sales volume of roving yarns and relevant products increased steadily QoQ; their earnings recovered. In 1H24, revenue from fiberglass and fiberglass products fell 4% YoY to Rmb910mn, and sales volume was largely flat YoY. We estimate sales volume of fiberglass and fiberglass products maintained high single-digit growth QoQ in 2Q24. As Changhai raised prices of direct yarns, chopped strand mats (CSM) and chopped fiber in 2Q24, we estimate that the firm's net profit per tonne of roving yarns and relevant products likely recovered by Rmb100-200 QoQ in 2Q24, and the ratio of roving yarn sales volume to the volume of relevant products remained stable in 2Q24. In addition, overseas revenue accounted for 27% of the firm's total revenue in 1H24, remaining relatively stable.

Earnings of chemical products improved QoQ in 2Q24. In 1H24, revenue from chemical products fell 7% YoY to Rmb289mn, and gross margin fell 3.7ppt YoY to 16.4%. However, we estimate that Changhai's resin sales volume recovered QoQ in 2Q24, with net profit per tonne up about Rmb200 QoQ. Rising resin sales volume and profit contributed to QoQ improvements in earnings of chemical products.

Financial expense ratio increased YoY due to lower forex gains. The firm's overall expense ratio rose 3.1ppt YoY to 12.8% in 1H24, and its financial expense ratio rose 2.8ppt YoY to 0.6% in the same period, which the firm attributed to a YoY decline in FX gains. Other expense ratios remained relatively stable.

90% of the 150,000t Phase I intelligent manufacturing project has been completed. According to corporate filings, important projects under construction in 1H24 included the 600,000t intelligent manufacturing project and the Tianma 3-to-8 project. As of June 30, 90% of the 150,000t Phase I intelligent manufacturing project was completed, and 80% of the 3-to-8　　project was completed.

Net operating cash flow plunged; capex increased; free cash flow came under pressure. Net operating cash flow reached -Rmb134mn in 1H24, mainly due to increased cash outflow from operating activities. In addition, the firm's capex reached Rmb318mn in 1H24 (vs. Rmb300mn a year ago), and the increase in capex temporarily weighed on its free cash flow. The firm's debt-to-asset ratio rose slightly YoY to 34%, but remained healthy.

Financials and valuation

As fiberglass supply-demand dynamics remain under pressure, we cut our 2024 and 2025 EPS forecasts 12% and 11% to Rmb0.67 and Rmb0.98. The stock is trading at 14x 2024e and 9x 2025e P/E. We maintain an OUTPERFORM rating. However, as sector valuations are constrained by supply pressure, we cut our TP 19% to Rmb11.8, implying 18x 2024e and 12x 2025e P/E and implying 29% upside.

Risks

Weaker-than-expected recovery in fiberglass demand; disappointing on- stream operation of new production lines.