Event: Dongfeng shares released its third quarterly report of 2022. 2022Q1-3 achieved an operating income of 2.827 billion yuan, an increase of 4.21% over the same period last year, a net profit of 285 million yuan, a decrease of 51.48%, and a net profit of 287 million yuan, down 50.22%. Among them, the operating income of 2022Q3 in the current quarter was 861 million yuan, up 1.19% from the same period last year; the net profit was 44 million yuan, down 62.81% from the same period last year; and the net profit after deducting non-return was 53 million yuan, down 54.16% from the same period last year. If you exclude the impact of fluctuations in investment income (after tax) caused by changes in the valuation of investment projects of the two consumer investment funds, the operating net profit will increase by about 6% compared with the same period last year.

Q3 revenue growth slowed down due to the epidemic, and medicine bags are expected to continue to grow. New materials are expected to release 22Q3's revenue of 861 million yuan, an increase of 1.19% over the same period last year, which has slowed down year-on-year growth. Our analysis is mainly due to the weakening of cigarette consumer demand caused by the epidemic. The company continues to promote the transformation of diversified business strategy, which is expected to form a second growth curve. In terms of pharmaceutical packaging business, the company has increased investment around the class I pharmaceutical packaging industry, and the 120 million yuan pharmaceutical packaging hard film production project in Taixing, Jiangsu Province has been carried out smoothly, and plans to invest 500 million yuan to build an intelligent manufacturing base for high barrier pharmaceutical packaging materials in Changzhou, Jiangsu Province in June 2022. At the same time, the company continues to open up new customers on the basis of the existing high-quality customers such as Beijing Sinovel and Broad Biology, and the bag business is expected to continue to grow.

In terms of new material business, the company gradually extends the new material business based on the base membrane business, focusing on the layout of high-growth tracks such as high barrier and new energy materials. In terms of high barrier membrane, the company plans to invest no more than 130 million yuan to build a new functional membrane material project in July 2022 to form a core product system based on recyclable high barrier materials. In terms of new energy materials, the company accelerated its layout and acquired the remaining stake in Bosheng New Materials, a subsidiary, in October 22. Bosheng new materials mainly engaged in power batteries and energy storage diaphragm products, is a small number of domestic companies with mass production of 12 μ m dry diaphragm, has entered the BYD, Ningde era supplier system. By the end of June 2022, the Hunan production base of Bosheng new materials is basically full, and the Jiangsu Yancheng production base has entered the stage of trial production.

Q3 gross profit margin increased year-on-year, cost investment optimization, and the decline in investment income dragged down the net profit margin profitability. 22Q1-3 gross profit margin was 30.61%, year-on-year decline of 1.09% pctbot 22Q3 gross profit margin of 28.00%, year-on-year growth of 0.42pct. Q3 gross profit margin improved compared with the same period last year, our analysis is mainly related to the optimization of product structure.

In terms of period expenses, the period expense rate of 22Q1-3 company is 15.71%, which is 1.86pct lower than the same period last year; the sales / management / R & D / financial expense rate is 4.10%, 7.41%, 4.61%, 0.40%, respectively,-0.76pct/-1.01pct/+0.48pct/-0.57pct. In addition, the investment income of the company 22Q1-3 was-39 million yuan, down 110.59% from the same period last year, mainly because the investment income (before tax) of the two consumer investment funds decreased by 397 million yuan compared with the same period last year. Under the combined influence, the net interest rate of the company's 22Q1-3 was 10.12%, down 11.36% from the same period last year. The net interest rate of 22Q3 was 4.66%, and 9.04pct was down from the same period last year.

In terms of cash flow, the net operating cash flow of 22Q1-3 was 365 million yuan, an increase of 5.80% over the same period last year.

Investment suggestion: the company's tobacco label business develops steadily and accelerates the transformation to a high value-added and prosperous track such as Class I pharmaceutical packaging materials and new materials, and the long-term development is expected. Excluding the factors of this merger and acquisition, we expect Dongfeng's operating income from 2022 to 2024 to be 39.57,46.36 and 5.209 billion yuan, an increase of 3.99%, 17.16% and 12.36% over the same period last year, and its net profit will be 4.08,5.42 and 727 million yuan respectively, up-48.03%, 32.84% and 34.13% over the same period last year, corresponding to PE of 19.7x, 14.8x and 11.1x.

Risk hints: the risk of substantial fluctuations in raw material prices; the risk that new business growth is less than expected; the risk that HNB policy regulation is more stringent than expected; the risk of repeated epidemics; and the risk that capacity construction is less than expected.