Incidents:

On April 20, the company released its 2022 annual report. In '22, the company achieved operating income of 1.153 billion yuan, a year-on-year decrease of 11.08%; net profit attributable to shareholders of listed companies was 113 million yuan, a year-on-year decrease of 39.27%; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 96 million yuan, a year-on-year decrease of 44.90%; and basic earnings per share of 0.40 yuan.

Weak consumer electronics put pressure on performance, and performance fell slightly short of expectations

The year-on-year decline in results in '22 was mainly due to weak downstream consumer electronics demand and rising raw material prices.

In '22, the global large-size LCD panel shipping area fell 5.7% year-on-year to 219 million square meters. Demand contraction led to a 20%/16% year-on-year decrease in the company's reflective film production/sales volume and a 15% year-on-year decrease in sales revenue. At the same time, the sharp rise in raw material PET prices caused the gross margin of products such as optical substrates to decrease 18.5 pct to -7.22% year-on-year; in addition, the company's diaphragm project was in the construction investment period, leading to high additional expenses.

The leading position of reflective film is stable, and profitability is expected to be restored

The company's reflective film shipments still rank first in the world, and its market share continued to increase in '22. Larger panels and miniLEDs are driving steady growth in the reflective film industry. According to Omdia data, the total number of Mini LED backlit LCD TVs shipped in 2022 was 3.1 million units. It is estimated that the number of Mini LED backlit TVs shipped in 2023 will be 5.7 million units, and by 2026, shipments are expected to reach 2010 million units. With the decline in PET prices, the recovery in consumer electronics demand, and the release of Mini LEDs, the profitability of the company's main business is expected to recover relatively quickly.

Lay out optical base films and lithium battery separator business continue to grow

The company is currently the global leader in reflective film, leading traditional foreign giants such as Japan's Toray and Teijin in product quality. Downstream is deeply tied to core international customers such as Samsung Electronics, and its global market share is over 50%. At the same time, the company entered the higher-barrier optical substrate business and lithium battery separator business, and built 80,000 tons of optical substrate film production capacity and 560 million square meters of diaphragm production capacity in Hefei, which is expected to contribute to the core increase in the company's future performance.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2023-25 to be 16/22/2.6 billion yuan, respectively, with a corresponding growth rate of 38%/36%/22% respectively, and the net profit of the mother is 2.3/33/46 billion yuan respectively, corresponding growth rate of 101%/45%/39%, EPS is 0.79/1.15/1.60 yuan/share, respectively, and a 3-year CAGR of 59%. In view of the strong competitiveness of the company's reflective film business and the rapid advancement of the optical base film and diaphragm business, we maintained the company's target price of 19.92 yuan and maintained the “buy” rating.

Risk warning: risk of falling demand; risk of rising costs; risk of projects under construction falling short of expectations