Benefiting from the increase in copper clad laminate prices and the rise in gross profit margin, the company's performance increased significantly and profitability improved significantly in 2021. At present, copper clad laminate has entered the price downward cycle, and the company's performance may be under pressure. however, the company has a prominent position in the copper clad laminate field and has the advantage of vertical integration of the industry chain, so it is recommended to pay continuous attention and downgrade to "overweight" rating.

Copper clad laminate prices and gross profit margin upward driven by substantial growth, profitability improved significantly. In 2021, the company achieved revenue of HK $28.8 billion, year-on-year + 66.5%; net profit of HK $6.782 billion, + 142.0%; gross profit margin of 34.0%, year-on-year + 6.8pcts, net profit rate of 23.5%, year-on-year + 7.3pcts. The substantial increase in the company's performance mainly benefited from the increase in copper clad laminate prices and the improvement of gross profit margin. From the expense point of view, the sales / management / financial expense rates of the company in 2021 are 1.8%, 3.3%, 0.3%, respectively, compared with the same period last year-0.6/-0.7/-0.2pct, mainly due to the scale effect brought about by performance volume and excellent cost control. From the perspective of 2021H2, the company achieved revenue of HK $14.88 billion, year-on-year + 41.8%, month-on-month + 6.9%; net profit of HK $3.43 billion, + 65.5%, month-on-month + 2.0%; gross profit 34.1%, year-on-year + 4.8pcts, month-on-month + 0.2pct.

From a sub-business point of view, the core business copper clad laminate, upstream raw material performance increased at a high speed compared with the same period last year. 1) CCL business:

2021 revenue of HK $23.04 billion, accounting for 80.0%, + 76.9% compared with the same period last year, including epoxy fiberglass copper clad laminate (HK $20.8 billion, 72.2%, + 86.2%) and paper copper clad laminate (HK $2.24 billion, 7.8%. Year-on-year + 20.8%), the price of CCL is driven by the shortage of raw materials upstream and the recovery of demand downstream, and the company has a perfect vertical industrial chain. Effectively ensure the supply of upstream core raw materials and help raise the price of copper clad laminates. 2) upstream materials business: 2021 revenue of HK $3.86 billion, accounting for 13.4%, + 57.2% compared with the same period last year, including copper foil, epoxy resin, fiberglass cloth and bleached wood pulp paper. Due to the tight supply of raw materials, the company's product prices increased compared with the same period last year. 3) other businesses: HK $1.91 billion in 2021, accounting for 6.6%, + 4.5% compared with the same period last year, including special resin sales (2.7%), property sales (2.1%) and hotel accommodation income (0.2%).

In the short term, copper clad laminate enters the price downward cycle, the performance may be under pressure; in the long run, the leading position is significant and has the advantage of vertical integration, but also accelerate capacity expansion and product structure upgrading, performance is expected to rise to a higher level.

In the short term, the price of copper clad laminate has continued to decline since 2021Q4, and the price of raw materials in the upstream has remained high due to the impact of the epidemic. It is expected that it will decline after the epidemic is under control in the future, and the company's performance may be under pressure. In the long run, the company has maintained the first share of CCL in the world for 15 consecutive years, with a prominent leading position; it is self-sufficient in the upstream core raw materials and has the advantage of vertical integration of the industrial chain; it also continues to expand production capacity, CCL. The new monthly production capacity of 1.2 million epoxy glass fiber clad laminate in Shaoguan, Guangdong will achieve full production. In terms of upstream materials, there will be an additional monthly production capacity of 13 million square meters of glass cloth in Shaoguan, 1500 tons of copper foil and 4200 tons of glass fiber in Qingyuan, and is expected to be installed in Thailand to meet the needs of overseas customers in the future. in addition, the company is expected to accelerate the structural upgrading of high value-added copper clad laminate products such as sheet, high-frequency, high-speed and non-halogen, which is expected to drive the performance to a higher level.

Risk factors: copper clad laminate prices fell sharply; downstream demand was lower than expected; the company's capacity climbing was lower than expected.

Investment advice: the company is the global leader in CCL, maintaining steady growth over a long period of history, benefiting from higher CCL prices and higher gross profit margin, and achieving high growth in 2021. In view of the fact that CCL has entered the price downward cycle, the company's performance will be under some pressure. We adjust the company's net profit forecast for the year 2022 to HK $5.48 billion (the original forecast is HK $6.81 billion), and add HK $4.66 billion to the 2024 net profit forecast, which corresponds to the EPS forecast of HK $1.76 million. Considering that the company has a prominent position in the copper clad laminate field and has the advantage of vertical integration of the industrial chain, we will continue to expand production capacity and optimize the product structure in the future. combined with the company's 5-year average dynamic PE of 9 times, taking into account the current copper clad laminate price downward cycle, we give it 8 times PE in 2022, corresponding to the target price of HK $14, downgraded to "overweight" rating.