Shenzhou Company (600810): Performance Under Pressure in 2024 with a Decline; Continues to Improve the Nylon Industry Chain Layout to Consolidate Leadership Advantage

Event: The company released its 2024 annual report, achieving operating revenue of 13.97 billion yuan in 2024, a year-on-year increase of 4% (on a追溯后 basis); realizing net profit attributable to shareholders of 0.34 billion yuan, a year-on-year decrease of 78% (on a追溯后 basis). In Q4 alone, the company achieved operating revenue of 3.76 billion yuan, a year-on-year decrease of 5.7%, and a sequential increase of 16.3%; realizing net profit attributable to shareholders of 0.07 billion yuan, a year-on-year decrease of 91%, and a sequential increase of 0.35 billion yuan.

Comment:

The nylon industry has seen a downturn, putting pressure on performance and leading to a decline in 2024. In 2024, the company's sales of PA66 chips amounted to 181,000 tons, up 4% year-over-year, with an average selling price of 17,430 yuan per ton, down 1.3% year-over-year; the sales volume of PA66 industrial yarns was 61,000 tons, up 15.4% year-over-year, with an average selling price of 25,254 yuan per ton, down 9.9% year-over-year; the sales volume of PA66 conveyor belts was 71,000 tons, basically unchanged year-over-year, with an average selling price of 29,342 yuan per ton, down 12.9% year-over-year. In 2024, the company’s procurement prices for raw materials adiponitrile and pure benzene were 16,900 yuan per ton and 7,400 yuan per ton, respectively, representing decreases of 7.7% and increases of 10.9% year-over-year. In 2024, new PA66 capacities were gradually put into production, leading to a significant increase in the sales volume of PA66 industrial yarns year-over-year. However, affected by the relatively weak supply-demand situation in the PA66 industry, chip prices have been oscillating at the bottom, while the prices of industrial yarns and conveyor belts have significantly declined, resulting in a decline in the company’s performance in 2024.

Continuously strengthen the lithium industry portfolio and expand the market to deeper depth of延链 supplement the production of super link in high density polyethylene, with company going internationalization into the southeast market. Meanwhile the company would move in deepening the business in Asia and positioning closer to export-oriented clients. In addition the company will continue to invest in the domestic civil business. The company would start to establish the production of the specialized carbon fiber products in 2024. Moreover the company has established 16% holding interest of Pinduan Sun Industry Group through Pinduan Invest Corporation (Pineview Industrial Holding) for acquiring and taking 25% equity in its high end private consumption polypropylene. The two projects commenced on building up production base at Huayue Industry for polypropylene which total annual output to 25,000 metric tons for year of 2024 and on collaborative production in Suzhou City and combining together on development project 7,000 ton for the polypropylene special high-density composite production with continuous ramp-up production starting this year

The company continues to increase investment in R&D innovation, expanding the laboratory reserves for new product projects. The pilot production base has been successfully established and put into operation. Six pilot projects, including the Nylon Intermediate Joint Laboratory and the Engineering Plastic Full Process Laboratory, have moved into the Nylon Materials Pilot Production Base. The Adiponitrile Full Process Laboratory has also been completed and put into use.

The launch of the equity incentive plan demonstrates the company's confidence in future development: In 2024, the company announced a restricted stock incentive plan, proposing to grant a total of 10.244 million shares of restricted stock to incentive recipients at a price of 3.8 yuan per share. The shares will be sourced from the company's repurchase of A-share common stock in the secondary market, accounting for 0.98% of the company's total share capital. This incentive plan will assess the company's performance indicators annually from 2025 to 2027: using the total profit of 2023 as the base, 1) the total profit growth rates for 2025, 2026, and 2027 are required to be no less than 60%, 100%, and 150%, respectively; the return on net assets is required to be no less than 4.5%, 5.5%, and 6.5%, respectively. 2) The total profit for 2025-2027 should not be lower than the average level of the industry or the 75th percentile level of benchmark enterprises. The equity incentive is conducive to promoting the construction of the company's core team and provides a solid guarantee for the realization of the company's future business strategies and goals.

Here is the translation: **Assessment of Earnings Forecast, Valuation and Rating:** Considering the industry outlook of Nylon, the company's earnings capability has decreased due to the industry downturn, so we have lowered the 2025-2026 earnings forecast, added 2027 earnings forecast, and estimated the 2025-2027 company's net income to be 0.45 (down 82%) / 0.89 (down 77%) / 1.32 billion yuan. The company's net income margin is estimated to be 0.04 / 0.09 / 0.13 yuan. **Production Capacity Continues to Improve:** The company's production capacity is steadily improving, and its growth space is opening up. The company is a leading player in the Nylon industry, and its industry outlook has improved after the industry downturn, making its earnings more resilient in the long term. Therefore, we maintain the "hold" rating. **Translation:** **Earnings Forecast, Valuation and Rating:** Considering the industry outlook of Nylon, the company's earnings capability has decreased due to the industry downturn, so we have lowered the 2025-2026 earnings forecast, added 2027 earnings forecast, and estimated the 2025-2027 company's net income to be 0.45 (down 82%) / 0.89 (down 77%) / 1.32 billion yuan. The company's net income margin is estimated to be 0.04 / 0.09 / 0.13 yuan. **Production Capacity Continues to Improve:** The company's production capacity is steadily improving, and its growth space is opening up. The company is a leading player in the Nylon industry, and its industry outlook has improved after the industry downturn, making its earnings more resilient in the long term. Therefore, we maintain the "hold" rating.