Deep Blue Technology Holdings is a well-known manufacturer of artificial leather chemicals in China, mainly engaged in the research, development, manufacture and sales of finishing agents and synthetic resins. According to the cautionary report, the company ranks fourth in China's artificial leather finishing agent market, with a market share of about 1.9%, based on 2018 revenue. At present, the company has 36 patents and is applying for 5 patent registration.
Sino-Thai viewpoint
China's artificial leather finishing agent market is highly fragmented and competitive: according to the report, the Chinese artificial leather finishing agent market is highly fragmented, with the top 10 participants accounting for 21.2% of the market share based on 2018 revenue. Sales of surface treatment agents and colorants will grow at a compound annual growth rate of about 5.6% and 5.7% respectively from 2018 to 2023, and the industry will grow slowly in the future.
In terms of operating performance: in the fiscal year 2016-2018 and as of September 30, 2019, the company's operating income was 150 million yuan, 160 million yuan, 170 million yuan and 130 million yuan respectively. The sales of the company's products mainly to Chinese customers accounted for nearly 98% of the total revenue. The income from the sales of finishing agents is the main part of the company's income, accounting for about 91.1%, 88.4%, 86.6% and 85.5% of the total revenue, respectively. The gross profit margin is 36.5%, 32.2%, 30.3% and 30.9% respectively; the company's main raw materials include polymers, solvents, dyes and auxiliary materials, accounting for about 82.2%, 85.2%, 86.3% and 84.4% of the total cost of sales, respectively. In addition, the average international crude oil price has increased at a compound growth rate of 27.7% in the past three years, and the company has not entered into any long-term agreement with any existing raw material suppliers, so the fluctuation of raw material costs may have a negative impact on the company's performance. The vast majority of the company's sales are credit sales, and the balance of trade receivables is about 45.1 million yuan, 52.7 million yuan, 46.6 million yuan and 72.3 million yuan respectively. If customers fail to pay to the company on time, the normal operation and recovery of the company's cash flow are under pressure; the net interest rates are 16.8%, 22.2%, 18.4% and 11.7%, respectively.
Valuation: based on 1 billion shares after the global public offering, the company has a market capitalization of HK $500 million to HK $600 million, which is lower than the average of its peers in Hong Kong. In 18 years, the price-to-earnings ratio of the company is about 13.9-16.7 times, which is higher than the industry average; the price-to-book ratio is about 1.92-2.14 times, which is higher than the industry average. In terms of profitability, the 18-year ROE and ROA were 24.2% and 17.5% respectively, higher than the industry average. Sponsors have 5 projects in 18 years, 4 up and 1 down, while there is only one project in 19 years, which broke on the first day. In addition, two new stocks in the chemical industry have also broken on the first day recently. Considering that the company is overvalued and the industry's growth slows in the future, we give it a 50-point rating of "do not apply".
Risk hints: (1) risk of rising cost of raw materials, (2) risk of market competition