The growth rate of the reflective materials industry can be expected. The company has advantages of scale and quality, and gradually realized localized substitution. According to the Forward-looking Industry Research Institute, the global reflective materials market reached 8.6 billion US dollars in 2020, and China's reflective materials market is expected to grow at an annual rate of about 8% in 2020-2025. The company's reflective materials sales rank first among domestic enterprises. As of June 2022, the company's main product, reflective materials, currently has a production capacity of 87.2 million square meters/year, with a total production capacity of 187 million square meters/year. The projects under construction include Zhejiang Xinghua's technical improvement project with an annual output of 37 million square meters of reflective materials, and Zhejiang Weifu Electronic Materials Co., Ltd.'s 150,000 square meter functional fabric production project. With advantages of scale and quality, the company is gradually achieving localized replacement. Through R&D and innovation, the company continuously optimizes the various properties of products, enhances and expands traditional reflective fabrics in various aspects such as weather resistance, anti-static, waterproof, fire protection, material strength, etc., and further lays out reflective materials in the consumer sector where market capacity is constantly expanding.

The company is committed to expanding into the new materials industry upstream of the industrial chain, independently developing and producing major raw materials to drive an increase in net interest rates. The average net interest rate of the company reached 15.0% in 2019-2021, mainly due to the company's efforts to expand upstream in the industrial chain, independently developed and produced adhesives as the main raw materials, underwent post-processing of base cloth and glass beads, and actively laid out a new material circuit. It has now achieved an annual output of 9120 tons of adhesives, an annual processing of 15,000 tons of glass beads and 25 million square meters of base cloth. The company invested 150 million yuan, 100 million yuan and 150 million yuan respectively to implement a 150 million square meter functional fabric production project, an adhesive project with an annual output of 50,000 tons, a functional materials and fabric production R&D center project, explore the new materials industry, further improve the company's production scale, intelligent manufacturing level and technological innovation capabilities, and help the company enrich its product line and improve the supply chain.

Increase investment in scientific research and implement technological innovation, and actively deploy the new energy industry and pharmaceutical industry. The company has always put independent innovation and technology research and development first. As of June 2022, it has independently developed 190 patents, including 26 invention patents (including 1 US invention patent), 71 utility model patents, and 93 design patents. It has rich technical reserves and strong R&D strength. In the third quarter of 2022, the company established a new holding subsidiary, Zhejiang Xinghua New Energy Development Co., Ltd., and Zhejiang Xinghua Biomedical Technology Co., Ltd., a wholly-owned subsidiary, to lay out the new energy industry and pharmaceutical industry. The company's strategic plan enters the field of new energy storage through the user side. Currently, it has obtained a sales agent authorization from the State Grid Zhejiang Energy Company and a license to operate Class II and Class III medical devices.

Profit forecasts and investment ratings. We predict that the company's net profit for 2022-2024 will be 0.97, 154, and 200 million yuan respectively. The corresponding EPS will be 0.81, 1.29, and 1.67 yuan/share, respectively. We will give it 25 times PE for 2023, with a corresponding target price of 32.25 yuan, covering a “superior market” rating for the first time.

Risk warning: the risk that demand in the downstream market falls short of expectations; the risk that the progress of production capacity under construction falls short of expectations; the risk that raw material costs will increase dramatically.