Deeply involved in the food and medical circuit, and the customer resources are of high quality. In 2009, the company officially positioned itself as a leading domestic manufacturer of raw paper for primary medical and food packaging, successfully breaking the monopoly pattern of overseas paper mills and entering the supply chain of world-renowned companies such as Ogilvy Healthcare and KFC. In 2018-2022, revenue increased from 541 million yuan to 953 million yuan (CAGR is 15.2%), and net profit increased from 27 million yuan to 97 million yuan (CAGR is 37.3%). The increase in profitability was mainly due to excellent cost control and continuous optimization of product structure.
The revenue/net profit of the 2023Q1-Q3 company was -11.7%/-18.2% year-on-year, respectively. Among them, Q3 benefited from peak season & low price pulp storage, and revenue & profit improved steadily over month.
Production capacity has been steadily deployed, and the product matrix has expanded horizontally. The actual production capacity at the end of 2022 was 97,000 tons, the capacity utilization rate reached 99.9%, and the actual production capacity reached 106,000 tons in 2023. A 50,000-ton new packaging paper production line and a 10,000-ton deep processing project began in October 2022. With the implementation of production capacity and mergers and acquisitions, the total production capacity is expected to reach 180/250,000 tons in 2024/2025. In terms of product structure, the company will continue to focus on the medical & food wrapping paper field, and expand downstream deep processing to expand new categories such as liquid packs.
The industry is steadily expanding to seize the dividends of the industry's rise. 1) Medical packaging paper: Production increased from 112,000 tons to 235,000 tons in 2015-2021 (CAGR reached 13.2%), of which dialysis paper/non-dialysis paper accounted for 53%/47% in 2021. Benefiting from the promotion of the final sterilization model and the gradual implementation of policy supervision, demand is expected to increase steadily. In 2022, the industry CR2 was 44.1%, and the market share of Hengda New Materials/Xianhe Co., Ltd. was 23.4%/20.7%, respectively. In the future, production of the industry will be tight and concentrated on leading enterprises. Combined with stricter supervision, the pattern is expected to be concentrated. 2) Food packaging paper: Production increased from 1.206 million tons to 2.67 million tons in 2015-2021 (CAGR is 14.4%), of which container/non-containerized food wrapping paper accounted for 91%/9% in 2021. With the implementation of plastic restrictions, demand is expected to continue to rise. In 2021, the CR2 for non-containerized food wrapping paper was 44.5%, and the market share of Xianhe Share/Hengda New Materials was 31.8%/12.7%. In the future, new production capacity will be mainly contributed by leaders, and the excellent pattern is expected to be maintained.
The advantages of R&D and production are remarkable, and the customer share is expected to continue to increase. 1) R&D side: The company's R&D cost rate is about 4% all year round, which is superior to the industry average, and has built an excellent market reputation through low-level R&D accumulation. 2) Production side: Profitability is higher than the industry year round and there is little fluctuation. Strong stability is mainly due to excellent cost control. The cost per ton CAGR in 2020-2022 is 7.3% (industry average is 10.2%). 3) Sales side: The company is a high-quality customer supplier and strategic partner of German League, Zhende and Weihai Weihai. It has cooperated with major customers for 5 years +. In the future, with deep partnerships in the early stages, the supply share is expected to continue to expand.
Profit forecast: The company's net profit from 2023-2025 is expected to be 1.04, 1.51, and 193 million yuan respectively (+6.8%, +45.1%, and +27.8% year-on-year respectively). The corresponding PE is 32.6X, 22.5X, and 17.6X, and the average valuation of comparable companies in 2023 is 18.3X. Considering that the company has plenty of momentum for subsequent growth, coverage for the first time, it was given an “increase in holdings” rating.
Risk warning: Fluctuations in raw material prices, macroeconomic fluctuations, policies falling short of expectations, and new production capacity falling short of expectations.