Kuncai Technology is a leading enterprise of pearlescent materials in China, which uses the world's first set of extraction titanium dioxide process to extend the industrial chain upstream. Pearl material has high gross profit margin and strong profitability. The company's extraction titanium dioxide production line is in trial production, with a capacity of 200000 tons to be put into operation. The products are located in the high-end market and enhance the company's profitability. We believe that the company focuses on pearlescent materials, and the high-end extraction of titanium dioxide opens the incremental space. It is estimated that the company's 2022-2024 net profit will be 6.32pm 1036max 1.535 billion yuan, corresponding to EPS forecast 1.35pm 2.06pm 2.96 yuan, giving the company a target price of 77 yuan, corresponding to 2022 PE 57x, covering for the first time and giving a "buy" rating.
Kuncai Technology is a leading enterprise of pearlescent materials in China, and its revenue is growing steadily. The company specializes in producing pearlescent materials, including industrial, automotive and cosmetic grade pearlescent materials, which are widely used in coatings, plastics, inks, cosmetics and other fields. At the same time, it has the ability to produce synthetic mica to provide guarantee for product quality. The company's production capacity has grown rapidly in recent years, implementing a dual-brand strategy to increase the market share of downstream products, and its operating income has grown rapidly. Its revenue CAGR reached 16.9% from 2016 to 2021.
The market space of pearlescent materials is vast, and the company implements a dual-brand strategy to occupy the high and low end market share. According to the Frost Sullivan report (quoted from Global New Materials International hearing), the global market for pearlescent materials will be 22.8 billion yuan in 2021; the agency also expects CAGR to reach 23.9% in 2021-2025, with a faster growth rate of cosmetic-grade automotive-grade pearlescent materials. The company established the "Moore" brand to firmly grasp the middle and low end of the market and contribute to stable revenue. Automobile grade and cosmetic grade pearlescent materials have high profit margin, and the gross profit margin can reach more than 70%. The company's synthetic mica production capacity will be 10,000 tons in 2018 and 20,000 tons during the 14th five-year Plan period, providing a guarantee for high-end pearlescent material products to seize market share.
The demand for titanium dioxide is growing steadily, and the supply side may usher in a reshuffle. The main application areas downstream of titanium dioxide are coatings and plastics, and its demand is closely related to the macro-economy, and we expect sustained and stable growth in the future; the supply side is moderately enhanced, and technological innovation will accelerate the industry reshuffle. The company adopts the world's first set of extraction process to open up the key links of the process, excellent product quality and co-production of high value-added iron oxide, which is competitive compared with sulfuric acid method and chlorination method. The company's 200000 tons of titanium dioxide and 200000 tons of iron oxide project entered trial production in February 2022, and the medium-term titanium dioxide production capacity is planned to reach 800000 tons. After the release of production capacity, it will become the second largest titanium dioxide supplier in China.
The company's products are positioned in the high-end titanium dioxide market to obtain more profits and become a new profit growth point.
Technological innovation drives development, and high-end positioning is consistent. The company has been ploughing in the field of pearlescent materials for many years, and timely launched high-quality pearlescent materials that meet the needs of the market through mature and innovative coating surface treatment technology. The company further enhances its potential to occupy high-end market share through synthetic mica technology. After more than 10 years of technical research and development, the company has opened the key link in the production of titanium dioxide by hydrochloric acid extraction, and has become the first set of certified scale process in the world, using titanium dichloride instead of titanium tetrachloride to save cost and increase efficiency. The company will forge ahead in technological innovation and optimize hydrochloric acid extraction process in the course of development.
Risk factors: the speed of putting new products into production is lower than expected; macroeconomic fluctuations; demand for by-products is lower than expected; the progress of the company's fund-raising plan is not as expected.
Investment advice: Kuncai Technology focuses on the manufacture of pearlescent materials and promotes the high-end market share of automobile and cosmetics. The company extends the industrial chain upstream, and the world's first 200000-ton extraction titanium dioxide process production line has entered the trial production stage, and will expand to 800000 tons of high-end titanium dioxide production capacity in the medium term, becoming the second largest supplier of titanium dioxide in China. Through the high added value of high-end titanium dioxide to bring new profit growth points, greatly enhance the company's profitability. It is estimated that the return net profit of the company from 2022 to 2024 is 1.535 billion yuan, respectively, and the corresponding EPS forecast is 1.35 million yuan, 2.06 yuan, 2.96 yuan. Combined with PEG valuation method and absolute valuation method, the company is given a target price of 77 yuan, corresponding to PE 57x in 2022, covering for the first time and giving a "buy" rating.
