2024 results largely in line with our expectations

Changhai Composite Materials (Changhai) announced its 2024 results: Revenue rose 2% YoY to Rmb2.7bn and attributable net profit fell 7% YoY to Rmb275mn. The firm's results are largely in line with our expectations.

New intelligent production line started operation at end-3Q24; sales volume of glass fiber and related products increased QoQ in 4Q24. In 2024, Changhai's revenue from glass fiber and related products rose 3.2% YoY to Rmb1.97bn, and its gross margin fell 3.7ppt YoY to 24%.

Specifically, sales volume was 0.3mnt and output was 0.31mnt. We attribute the increase in production and sales volume to the launch of the 150,000t/year intelligent production line at end-3Q24. We believe the company's sales volume of glass fiber and related products exceeded 90,000t in 4Q24.

Recurring net profit per tonne was slightly under pressure in 4Q24 compared to 3Q24, mainly due to: 1) The additional costs caused by the ramp-up of the new intelligent manufacturing line in the early stage of operation; and 2) adjustments in the sales structure of yarns and related products.

Full-year sales volume of chemical products fell, but profit margin improved. In 2024, revenue from chemical products rose 1.3% YoY to Rmb648mn, with sales volume down 9% YoY to 71,146t due to weak demand for unsaturated resins. Blended gross margin rose 4ppt YoY to 19.5%, possibly due to improved earnings of some fine chemicals.

Expense ratio rose 0.92ppt YoY to 12.4%. Specifically, R&D expense ratio remained stable at 5%, selling expense ratio edged down 0.22ppt to 2.4%, and G&A expense ratio rose 0.42ppt YoY to 4.9%, with salaries & welfare and consulting fees contributing 0.13ppt and 0.25ppt to the growth. The financial expense ratio rose 0.78ppt YoY to 0.08%, mainly due to lower foreign exchange gains and losses.

Net operating cash flow declined, and the liability-to-asset ratio was well under control. In 2024, Changhai's operating cash flow fell 38% YoY to Rmb448mn. We estimate that the operating cash flow-to-revenue ratio declined 16ppt YoY to 69% and net operating cash flow-to-net profit ratio fell 80ppt YoY to 163%, implying a marginal increase in cash flow pressure. The firm's liability-to-asset ratio rose 6ppt YoY to 35.07% in 2024, up slightly but still lower than peers.

Trends to watch

There is still room for cost reduction after the ramp-up of the new production line. We believe the firm's 150,000t/year intelligent production line may boost its sales volume and reduce costs. First, the firm is equipped with a powder processing plant, which may reduce its cost by Rmb100/t. Second, the lower consumption of natural gas and electricity by the intelligent production line may help reduce costs by Rmb100-150/t. Taking into account the impact of depreciation and rising shared costs of the new production line, we estimate the new production line may reduce the cost by about Rmb100-200/t. In addition, the firm's sales volume of chemical products has roughly hit the trough, in our view, and earnings of fine chemicals may improve marginally.

Financials and valuation

Considering that external shocks may affect the firm's future sales volume, and the YoY increase in the proportion of raw yarns in total sales and YoY decline in the proportion of finished products may weigh on its blended net profit per tonne, we cut our 2025e EPS forecast by 5% to Rmb0.93 and introduce our 2026e EPS forecast of Rmb1.20. The stock is trading at 11x 2025e and 9x 2026e P/E. We maintain an OUTPERFORM rating and cut our TP by 5% to Rmb11.2, implying 12x 2025e and 9x 2026e P/E and implying 6% upside.

Risks

More severe-than-expected overcapacity of glass fiber; disappointing recovery in demand; sharper-than-expected impact from tariffs.