A leader in the reflective materials industry, the pandemic disrupts short-term performance. The company is mainly engaged in R&D, design, production and sales of reflective materials and their products. The main products include reflective cloth, reflective clothing and other products. The company continues to be deeply involved in the R&D, market application and development of reflective materials. It has now accumulated rich experience in technological innovation, process improvement, production profit, quality control, etc., and has won honors such as “National High-tech Enterprise” and “Innovative Demonstration Small and Medium Enterprise in Zhejiang Province”.

The company's revenue and net profit for 2021 were 792 million yuan and 135 million yuan, and the compound growth rate for 2017-21 was 24.45% and 59.57%. 2022H1 was affected by the spread of the domestic epidemic. Demand for the company's downstream orders shrank and logistics were blocked. The company achieved revenue and net profit of 368 million yuan and 45 million yuan, an increase of -3.39% and -0.72%. The company developed its main business in reflective materials and actively expanded new tracks. In August 2022, it established a holding subsidiary, Xinghua New Energy, to cultivate more business growth points.

Driven by occupational safety+consumer fashion demand, the reflective materials industry is developing rapidly. As the core product of the reflective industry chain, reflective materials can be divided into reflective cloth and reflective film according to materials, processes, and applications. The downstream applications of reflective cloth are mainly used in the occupational, personal safety protection and consumer markets. In recent years, on the one hand, the safety awareness of enterprises and residents has gradually increased, and professional and personal safety protection has become more and more strict; on the other hand, reflective cloth technology has become more mature, material comfort and aesthetics have gradually improved. Reflective elements have been used more in the fields of clothing, bags, shoes and hats, enhancing product trends and a sense of technology, and are favored by sports and casual footwear brands and consumers. The continuous penetration of reflective cloth in the consumer field has led to broad market growth. Judging from the industry pattern, foreign companies have a strong first-mover advantage and leading position in the field of high-end reflective materials, and domestic enterprises have followed suit and gradually achieved import substitution. In the field of reflective fabrics, the company is leading domestically in terms of revenue scale, R&D strength and technical level. It ranked first in the country in sales volume and revenue in 20 years, and has a strong leading advantage.

Advanced technology and economies of scale empower all categories of strategies, and high-quality development enhances brand recognition. 1) The company attaches importance to technology research and development. On the one hand, through industry-university-research cooperation, it optimizes and improves technical processes to improve product quality and production efficiency. In recent years, the unit consumption of glass beads and adhesives has continued to decline; on the other hand, it has continuously expanded the application fields and scenarios of reflective cloth, relying on advanced process technology to improve product stability and cost performance, and meet the needs of different groups in multiple scenarios. The company innovatively developed a new type of reflective cloth rich in fashion elements, leading the demand in consumer scenarios. 2) The company's leading technical technology and fine management ensure low unit costs, form a strong scale advantage, empower all categories of strategies, and further provide customers with customized, small-order, fast-reversal production models, and accumulate strong customer stickiness and satisfaction. 3) The company pays attention to product quality. The products have obtained many environmental and safety certifications from around the world, including CE, SGS, UL, etc., to establish strong brand recognition. Downstream is bound with world-renowned employee tooling brands Portwest and YKK to enjoy high-quality customer resources.

The construction of new projects has brought growth momentum to the main industry, and the new energy track has built a new competitive advantage. 1) In terms of main business, the company's new Jingshan base project was successfully put into operation in 2020. The implementation of the new production capacity helped the company improve automated and intelligent production, and strengthened its product scale advantage. The company will actively adapt to the trend of expanding consumer market capacity, gradually expand the consumer reflective business with fashion elements represented by fancy reflective cloth and colorful reflective cloth through the expansion of production capacity of functional fabrics and R&D centers, and continue to optimize the product structure to expand into high-value-added products such as industrial wash-resistant products. 2) The company actively lays out the field of new energy. In August 2022, the company invested 70 million yuan to participate in the establishment of Xinghua New Energy Company with its own capital. The company holds 70% of the shares and enters into related businesses such as power sales and distribution and contract energy management. Chairman Wang Shijie has a background majoring in electrochemistry at Xiamen University, and has rich resources such as new energy alumni, which is expected to empower the company's new track business layout.

Profit forecasting and investment ratings. We are optimistic about the company's strong technology research and development capabilities, cost advantages brought about by technical reform, and stable quality assurance capabilities. Driven by demand for reflective fabrics in downstream consumption and fashion markets, and the expansion of the company's product structure in the direction of high added value, the company can be expected to grow in the future. We expect revenue for 2022-2024 to be 805/10.44/1,334 million yuan, an increase of 1.66%/29.66%/27.84%, and net return profit of 1.05/1.55/199 million yuan, an increase of -22.52%/47.98%/28.41%. With PEG and DCF, we gave the company a target price of 29.09 yuan. The company's competitive advantage is obvious, short-term performance is under pressure, and there is a lot of room for long-term development. For the first time, we gave the “buy” rating.

Risk factors: Recurring global epidemics, new production capacity falling short of expectations, risk of fluctuations in raw material prices, risk of reduced holdings of restricted shareholders at maturity, etc.