Baihong Industrial issued an announcement on August 3, 2011, stating that the company has approved the establishment of a new wholly-owned subsidiary, Baihong Hi-Tech Materials ('Billion Hi-Tech Material'), and the total investment is expected to be no less than 999.99 million US dollars (about 645 million yuan). Baihong Hi-Tech Materials will manufacture and sell polyester films, specifically functional bidirectional stretched polyester films (BOPET). The company plans to invest around 350 million yuan to develop the polyester film business, including the construction of two new plants. The company expects the new production facility to commence commercial production by May 2012.
Two-way stretch polyester films are used in flexible packaging (for food and personal care products), metallic yarns, cables, transformers, capacitors, audio or video tapes, hot stamping foils, distribution films, decorative ribbons, and labels. According to 'Plastics Today', the price of BOPET has dropped from around $5.00 per kilogram to $2.40 per kilogram in China, and the addition of new production this year may cause the price to decline further. China's BOPET production capacity is estimated to be about 1 million tons in mid-2010, and China still has 120 million tons of production capacity under construction. Production is expected to begin soon. According to PCI FilmsConsulting's survey, flexible packaging is the main driver of the BOPET industry, accounting for 54%, and it is estimated that flexible packaging will remain at around 8.5% during annual growth worldwide.
We estimate that Baihong Industrial's BOPET business will have a net profit of 3.4% to 5.5% in 2012. Although BOPET prices may continue to fall, we expect demand growth to continue and industry gross margins to continue to fluctuate. We believe Baihong Industrial's entry into the BOPET business will benefit the company by diversifying the company's revenue sources and adding another source of profit. We maintain our 'buy' rating and target price of HK$6.80. Currently, the company's stock price is equivalent to 11.9 times the price-earnings ratio in 2011 and 1.9 times the net price-earnings ratio in 2011.
