Key points of investment
The year-on-year decline in the capacitor industry dragged down corporate performance. The company's revenue and profit both declined in the first quarter. EPS was 0.10 yuan, lower than the profit forecast of 0.13 yuan in our quarterly forecast. We think the biggest impact comes from the impact of the downturn in the downstream capacitor industry. We expect the company's overall electrolytic paper shipments to drop by about 10-20% compared to the same period last year, while another main product, non-woven wallpaper, we expect prices to drop significantly due to competition in the industry and real estate regulation, so profits fell short of earlier expectations.
Gross margin fell 2 percentage points year over year, and production capacity for construction projects was put into operation. The company's gross margin is expected to fall by 2 percentage points year-on-year due to reduced shipments and falling prices of non-woven wallpaper. Due to lower market prices for non-woven wallpaper products, we expect it will be difficult for the gross margin level to rise in the second quarter. On the other hand, the company's construction projects have dropped to 42 million, and we expect production capacity for non-woven wallpaper and electrolytic paper to a certain extent.
The company expects the EPS to drop by about 0-30% in the second quarter, equivalent to 0.19 to 0.27 yuan of EPS. The second quarter of 2011 was a period of boom in the capacitor industry. Shipments in a single month could reach around 600 to 700 tons. Currently, although electrolytic paper sales are expected to improve to a certain extent month by month, it is difficult for overall shipments to return to the higher position of the previous period, so the company expects a certain decline in year-on-year profits.
Finance and Valuation
We expect consumer electronics demand to pick up in the second half of the year and maintain the buying rating. The company has a high competitive barrier in the electrolytic paper field. The decline in company shipments due to weak downstream demand is a temporary phenomenon. From the quarterly reports of companies such as Jianghai Co., Ltd., we can note the overall decline in the industry. As we enter the peak consumer electronics season in the third quarter of the second half of the year, it is expected that the company's downstream demand will pick up. We maintain the forecast that the company's earnings per share in 2012-2014 will be 0.69, 0.84, and 0.96 yuan respectively, with a target price of 17.40 yuan, maintaining the company's buying rating.
Risk warning
Overall demand in the industry continues to decline, and shipments of electrolytic paper products remain low; price competition for non-woven wallpaper intensifies, and product gross margin continues to decline.