Performance review

The 2022 results fell short of our expectations

The company announced its 2022 results: revenue of 3.744 billion yuan, -1.6% year on year; net profit of 289 million yuan, -63.2% year on year; net profit of the mother after deduction was 288 million yuan, -63.0% year on year. Under the influence of the pandemic, investment income and impairment of goodwill, the company's performance fell short of our expectations. Excluding the impact of investment income and impairment of goodwill, net profit returned to the mother in '22 fell 21.7% year-on-year.

On a quarterly basis, the company's 1Q-4Q achieved revenue of 10.47/9.19/86.917 billion yuan respectively, +7.8%/+3.2%/+1.2%/-16.0%, respectively; the net profit of the mother was 1.21/1.20/0.44/04 billion yuan respectively, down 50.7%/46.3%/62.8%/98.1%, respectively.

Development trends

Overall revenue growth is under pressure. The company's revenue in '22 fell 1.6% year on year, mainly affected by the epidemic. By business, 1) Tobacco label: Sales revenue in '22 fell 0.4% year-on-year to 2,579 billion yuan. Mainly affected by changes in terminal demand and increased competition, sales increased 1.35% year-on-year to 3.365 million large boxes. 2) Pharmaceutical packages: Sales revenue increased 8.2% year-on-year to 589 million yuan in '22. Resource sharing and mutual collaboration among subsidiary companies such as Chiba and Huajian drove steady revenue growth. 3) New membrane materials: Sales revenue fell 0.9% year-on-year to 294 million yuan in '22. We expect Bosheng's lithium battery separator business to grow rapidly. (Note: There is a difference between operating income and sales revenue in this section.) Increased competition and rising costs affect profitability. The company's gross margin in '22 fell 2.0ppt to 29.6% year on year, of which 4Q gross margin fell 5.1ppt to 26.4% year on year. In terms of period expenses, the fee rate for the 22-year period decreased by 1.7ppt to 16.0% year-on-year, continuing to reduce costs and increase efficiency. Affected by changes in investment income and impairment of goodwill, the net interest rate of the mother fell by 12.9 ppt to 7.7%, but we estimate that after excluding this influence, the net interest rate of the mother declined by about 2.2 ppt over the same period last year.

The new materials business contributes new momentum to growth. We think demand for cigarette labels will pick up somewhat in '23 as consumption recovers. Furthermore, we expect that the company's consumer investment fund projects will enter the payback period one after another, and the impact of future investment income on performance will gradually decrease. The company's business strategy was transformed, and Bosheng New Materials was acquired in 2022. The development goals of the new materials business segment were further clarified. Bosheng New Materials cooperated well with high-quality customers such as BYD and Ningde Times on the dry lithium battery separator business. Under strong demand, the company's production capacity expanded rapidly. In February of this year, the company announced that Bosheng subsidiary plans to invest a total of 4 billion yuan in new production capacity, focusing on subsequent capacity commissioning and climbing.

Profit forecasting and valuation

Considering changes in demand and the company's strategic transformation, the 2023 revenue was lowered 13.7% to 4,017 billion yuan, the EPS was lowered by 18.4% to 0.24 yuan, and the 2024 profit forecast was introduced. We expect the 2024 EPS to increase by 14.6% to 0.27 yuan. The current stock price corresponds to 2023/2024 by 18/16 times P/E, respectively. Maintaining an outperforming industry rating, based on profit forecast adjustments and valuation switching, the target price was lowered 7% to 5.00 yuan, corresponding to 21/18 times P/E in 2023/2024, respectively, and there is 15% upward space compared to the current situation.

risks

New business progress fell short of expectations; industry policy changes.