For 3Q23, Taihua posted revenue/net profit/ex-one-off net profit of Rmb1,319mn/144mn/125mn (+37.26%/+148.6%/+230.6% YoY) respectively.

The Company's earnings improved significantly in 3Q23, thanks to the improvement of industry prosperity, the booming supply of and demand for its differentiated products, and a low YoY base. The data from ccfei.com show that the operating rates and product prices of the nylon industry have continued the recovery trend in 4Q23. This, coupled with possibly gradual recovery of downstream consumer demand, may continue the industry's prosperity. Recently, Taihua's Huai'an project (nylon 66) has been successfully commissioned, and the equipment of the chemical-recycled nylon project will be installed soon. Since incremental production capacity may drive the Company's earnings growth in 2024 and beyond, we reiterate the "BUY" rating.

Significant improvement in 3Q23 earnings, with 3Q23 revenue/net profit up 37.3%/148.6% YoY.

For 1-3Q23, Taihua posted revenue/net profit/ex-one-off net profit of Rmb3,516mn/327mn/248mn (+16.83%/+9.99%/+18.87% YoY) respectively.

In 3Q23 alone, the Company achieved revenue/net profit/ex-one-off net profit of Rmb1,319mn/144mn/125mn (+37.26%/+148.6%/+230.6% YoY) respectively. Since the start of 3Q23, downstream demand has been recovering gradually, and the nylon industry has been rebounding. Taihua's earnings improved significantly in 3Q23, thanks to the improvement of industry prosperity, the booming supply-demand dynamics for its differentiated products, and a low YoY base.

3Q23 NPM reached a high point since 2020, thanks to improved GPM and optimized expense ratios.

In 1-3Q23, Taihua's overall gross profit margin (GPM) stood at 21.76% (-1.4ppts YoY). In 3Q23 alone, the Company's GPM came in at 22.76% (+2.8ppts YoY/+1.1ppts QoQ) respectively. Thanks to a higher production capacity utilization rate and its differentiated products, the Company has maintained a GPM improvement trend since the start of 2023. In 3Q23 alone, Taihua's selling/administrative/R&D/financial expense ratios changed by -0.2ppts/-2.4ppts/-0.7ppts/-0.4ppts YoY, showing a trend of optimization for all expenses. Driven by this, the Company posted net profit margin (NPM)/ex-one-off NPM of 10.9%/9.5% (+4.9ppts/+5.6ppts YoY) in 3Q23, both were high during the same period since 2020. This means that the Company's earnings elasticity has been fully unleashed.

Outlook: Steady progress in Huai'an project; incremental production capacity may drive earnings growth in 2024.

The data from ccfei.com show that the operating rates and product prices of the nylon industry have continued the recovery trend in 4Q23. This, coupled with possibly gradual recovery of downstream consumer demand, may continue the industry's prosperity. Recently, Taihua's Huai'an project (nylon 66) has been successfully commissioned, and the equipment of the chemical-recycled nylon project will be installed soon. Incremental production　　capacity may drive the Company's earnings growth in 2024 and beyond.

Potential risks: Sharper-than-expected fluctuations in upstream raw material prices; downstream demand falling short of expectations; disappointing progress in the Company's production capacity expansion; the progress of raw material localization missing expectations.

Investment recommendation: Taihua's 3Q23 revenue/net profit grew by 37.3%/148.6% YoY, respectively.

The Company's earnings improved significantly in 3Q23, thanks to the improvement of industry prosperity, the booming supply-demand dynamics for its differentiated products, and a low YoY base. Considering some delay in the progress of some chemical-recycled nylon production lines in Taihua's Huai'an project, we slightly lower our 2023E/24E/25E EPS forecasts to Rmb0.52/0.83/1.04 (from Rmb0.58/0.87/1.05). With the Company's 17x forward PE in recent five years and the 17x 2024E PE (based on CITICS Research forecasts) of Weixing Industrial (002003.SZ, a high-quality manufacturer) as references, and considering the high earnings elasticity brought by the commissioning of Taihua's new projects (we anticipate the Company's 2023-25E net profit CAGR to reach 42%, and that of Weixing Industrial to be 20%), we assign 18x 2024E PE to arrive at a target price of Rmb15 and reiterate the "BUY" rating.