A typical example of a rare “small but beautiful” company in the new electronic materials sector. The company's traditional thermal magnetic ticket business has high barriers, maintaining a gross margin of around 60% and a net interest rate of around 40% for a long time. The company inherits the technical advantages of the actual controller, Aerospace Science and Technology Group and the majority shareholder Lekai Group. It has deep accumulation in technical fields such as particles, film formation and coating, and materials such as magnetic recording and thermal recording. It has strong core competitiveness. The company's core technical capabilities are highly expandable, and it is expected to make significant progress in the field of electronic materials in the future; at the beginning of listing, the company basically achieved full shareholding and full benefit binding.
5G is expected to double the growth of the FPC electromagnetic shielding film (EMI) industry, and the company is expected to accelerate domestic substitution in the EMI and ACF fields. EMI is mainly attached to the surface of the FPC to prevent electromagnetic interference. Currently, the market space is about 3 billion dollars. The electromagnetic environment is more complex in the 5G era. The EMI industry is expected to experience a sharp rise in volume and price, achieve double growth, and the company has sufficient production capacity reserves. Currently, it has entered the supply chain of major domestic brands such as Huawei, and is expected to make progress in the future for major international customers; on the ACF side, the company has now verified that domestic production is smooth, and batch delivery is expected to be achieved in 19H2.
The only domestic/second supplier of pressure test membranes in the world. It has fully entered major panel manufacturers such as BOE, Shentianma, etc., and has great potential to segment the high-margin market. As an indispensable pressure measurement consumable for automobiles, panels, etc., the market is currently monopolized exclusively by Japan's Fuji. Industry research shows that its sales in China are about 700 million yuan, and the net interest rate of the product can reach more than 80%. Currently, the company is the only supplier of BOE and Shentenma other than Fuji in Japan, and is expected to gain half of the market share within three years.
The electronic materials industry base has been built, the product matrix has strong ability to expand horizontally, and there is plenty of room for future growth. In August 2018, the company signed an investment agreement with Chengmei Industrial Park in Meishan, Sichuan. It plans to invest 500 million yuan to build a new electronic materials R&D and industrial base. After delivery, the company is expected to achieve an output value of 400 million yuan. The company has accumulated deep technology, various core materials are in the R&D stage, and the product matrix is expected to continue to expand, laying a solid foundation for the company's rapid development in the next 3 to 5 years.
Profit forecasting, valuation and investment ratings: We expect the company's performance in 2018-2020 to be 104 million yuan, 131 million yuan and 202 million yuan respectively. The corresponding PE is 36 times, 28 times, 18 times, respectively. The company's main business is running smoothly. Currently, stock prices and valuations are still at historically low levels, with a good margin of safety. A comprehensive breakthrough in the 5G new materials product matrix is expected to help the company embark on a golden growth period of the next 3 to 5 years. Targets are scarce, and there is good valuation flexibility upward. Combining the company's 19-year performance expectations and industry valuation levels, we think the company's reasonable market value is around 40 times, with a target price of 42.8 yuan, raised to a “aggressive” rating.
Risk warning: the risk of electronic material development and industrial base project construction and the risk that project benefits will not meet expectations; the risk that the future sales scale of electromagnetic wave protective film products will fall short of expectations; the growth of the thermal magnetic stripe business has stagnated under the EMV migration trend.
