Watson Technology is a manufacturer of high-quality aquatic materials. Founded in 1996, the company focuses on the R & D and production of composite materials, and successively introduces flexible materials (light box advertising materials, cover materials) and airtight materials (inflatable yacht materials, wiredrawing air cushion materials). Airtight materials are mainly used for water inflatable products, is the core category of the company at present, growing rapidly, leading to an upward trend in revenue and profits, accounting for 80% of revenue in 2020, of which drawing air cushion materials account for 58%. The technical barrier of wiredrawing air cushion material is high, and the company has mastered all the production technology. The gross profit margin of the wiredrawing air cushion material remains above 50%, and the increase in the proportion drives the overall gross profit margin to continue to rise, making the overall gross profit margin of the company basically maintain above 40% in the past three years. Wiredrawing air cushion material is also the main development category of the company in the future.

The technology of the company is leading, and the competition pattern of wiredrawing air cushion material is concentrated. The weaving and sizing fitting of wiredrawing base cloth is the core process of drawing air cushion material production, which requires many professional technologies such as loom modification and supporting software design, and generally requires manufacturers to have a long time of research and development and accumulation. At present, the company has achieved a breakthrough in all production processes. The wiredrawing air cushion material will be replaced by domestic gradually after 2012, but there is still room for substitution. At present, there are mainly three domestic participants, which basically divide the domestic market, and there is little output gap between them. From the point of view of the capacity expansion of wiredrawing air cushion materials, the company is most focused on subdivision, and we think the company can fully enjoy the development of the industry.

Airtight materials are mainly used for water sports, with a broad market and high prosperity in the industry, and it is expected to expand the scope of application in the future. Watson Technology airtight materials are mainly used for water inflatable outdoor supplies, of which 70-80% of the wiredrawing air cushion materials are used in the production of water skis and yoga mats. The development of the company's business is closely related to the needs of international and domestic outdoor sports, especially the development of water sports. The global market for aquatic leisure products is about US $46 billion, accounting for about 18% of the global outdoor leisure product industry. The growth rate of water sports is faster than that of the entire outdoor leisure product market in recent years. Among them, the water inflatable leisure product market accounts for 7.5% of the entire aquatic leisure product market, with a market size of about US $3.5 billion and a growth rate of more than 10%. In addition to water sports equipment, wiredrawing air cushion materials have a wide range of potential applications, including protective, medical, rescue and other fields. The application of airtight materials has customized characteristics, and Watson Technology is expected to continue to occupy the market by relying on forward-looking applied research.

The company's fund-raising projects will solve the capacity bottleneck, and the price of downstream products will pick up. The company's capacity utilization rate has remained high in the past two years, and the capacity utilization rate of wiredrawing base cloth reached 104% in 2020. The company raised investment projects to build 4.5 million square meters of wiredrawing base cloth. In the future, the production capacity of the company's wiredrawing air cushion material will be expanded to 2.4 times that of the current. In addition to the release of production capacity, the company's product prices have fluctuated under the influence of raw material prices in the past. The boom in terminal demand and the rebound in raw material prices will lead to the recovery and stabilization of major product prices and boost revenue growth.

Profit forecast and investment advice: the company focuses on and ploughs deeply in the field of wiredrawing air cushion and continues to move forward. In the context of the prosperity downstream of the wiredrawing air cushion and the promotion of the scope of use, the company continues to enjoy the development of the industry through the expansion of production capacity. The company is expected to achieve operating income of 6.58,8.22 and 1.019 billion yuan from 2021 to 2023, and its net profit is expected to be 1.98,2.64 and 328 million yuan respectively. The company's current net profit forecast corresponds to PE levels of 17.7,13.28,10.66 times, and we believe that companies with technological advantages can enjoy a certain valuation premium. The company is covered for the first time and given a "recommended" rating.

Risk tips: raw material prices fluctuate violently; the company's new capacity construction is not as expected; the progress of new product development is not as expected.