Core viewpoints
It is optimistic that the oligopoly structure of the company's DSD acid and the continued growth of other intermediates, the annual net profit is expected to be 10.13 billion yuan (RMB) in 2019-20-21. At a comparable valuation, the company was given a "buy" rating of 4.5x PE and a share price of HK $5.1m for the first time.
Laureate Chemistry is the leader of dyes and pigment intermediates in the world. The Lottery Chemical business covers dyeing pigments and pesticide intermediates. The dye intermediates are mainly DSD acid, and the pigment intermediates are mainly composed of DATA (intermediates MDS and DMSS are also exported) and DMAS. The company's DSD acid, DMSS and DMAS account for 53.0% of the global market share, 42.7% and 19.8% of the global market share, respectively, ranking first or second in the world. In addition, all kinds of mononitrotoluene and pesticide intermediate OT also have a global status, currently the company's global share of mononitrotoluene is 18.8%. The company is a leading green manufacturing enterprise in the global subdivision field.
The company has benefited significantly from the rise in the price of DSD acid. At present, there are three main enterprises producing DSD acid in the world, and Lottery Chemical is the main supplier of DSD acid and OBA, accounting for more than 60%. Laiya, the world's second-largest chemical company, has stopped production since the first half of 2018. Affected by this, the global supply of DSD acid shrank significantly, and product prices continued to rise.
In 2018, the average price of DSD acid was 25000 yuan / ton. By the end of 2018, the price of products excluding tax has increased to 68300 yuan / ton, an increase of 173%. Lottery Chemical has 35000 tons of DSD acid, which benefits obviously. Considering the high requirements of environmental protection in Jiangsu, the tight supply pattern is likely to be maintained for a long time, and the high price of DSD acid is expected to remain for a long time.
Other dyed pigments and pesticide intermediates continue to increase. The company's pigment intermediates, including DMSS (DATA), DMAS and other products, currently account for 42.7% and 19.8% of the global market share, and are expected to continue to increase with the tight domestic pigment supply, downstream demand expansion and other factors. The company's mononitrotoluene and pesticide intermediates also have a global status, and the company is currently actively expanding through overseas markets and downstream pesticide intermediates, and is expected to have sustained revenue in the future. In addition, the company's recent development of two new businesses, including lithium materials and environmental protection consulting business, is expected to show outstanding performance with the rapid development of the industry.
Keep practicing the strategy and expand the territory rapidly. In addition to the existing main business, the company is expected to expand in the industrial chain and new products. The company has rapidly improved the industrial chain of DSD acid through mergers and acquisitions and leasing, which is expected to bring significant economies of scale to increase gross profit margin. At the same time, the company also actively enriches other products in the industrial chain, including pesticide intermediates such as OT and lithium materials such as NMP. Considering that the company still has a lot of technology and market reserves in pigments and other intermediates, it is expected that the company will continue to expand its products in the future to bring new revenue and profit contributions.
Risk factors: 1, the instability of global oil prices will put pressure on the company's product prices and gross profit margin; 2, the decline in global demand for dyed pigments and agricultural inputs.
Earnings forecasts and valuation assumptions. Optimistic about the oligopoly of the company's DSD acid and the continued growth of other intermediates, the company's annual net profit in 2019-20-21 is expected to be 10.13 billion yuan (RMB). We select the median valuation of the comparable company to give the company 4.5 times PE in 2019, corresponding to HK $5.3 billion, and the corresponding share price of HK $5.10, giving a "buy" rating for the first time.