Incidents: On October 31, 2023, Matsui Co., Ltd. released its three-quarter report for 2023. The company's revenue for the first three quarters was 415 million yuan, up 6.95% year on year; net profit was 54 million yuan, down 16.16% year on year; net profit after deduction was 47 million yuan, down 18.00% year on year. The corresponding company's 3Q23 operating income was 169 million yuan, up 11.61% month on month; net profit was 27 million yuan, up 13.52% month on month.
Driven by the consumer electronics and passenger car sectors, 3Q23's performance improved month-on-month. In the first three quarters of 2023, the company's revenue in the high-end consumer electronics/passenger car sector was 340/067 million yuan, and YoY was 1.54%/32.17% respectively; in a single quarter, the revenue of the 3Q23 high-end consumer electronics sector was 140 million yuan, up 20.06% year on year, up 12.04% month on month. The main reasons for this are the arrival of the traditional peak sales season, the recovery in the consumer electronics sector brought about by improved terminal demand, and the provision of supporting coatings for major domestic H customers, Mate 60, a series of new products for major consumer electronics customers in North America Solution. In 3Q23, the revenue of the passenger car sector was 27 million yuan, up 23.25% year on year and 14.02% month on month. The main reason for this is to deepen cooperation with many well-known terminal and auto parts manufacturers, and while concentrating on the interior coating market, we are making every effort to promote the smooth implementation and mass production of exterior coating projects. In the first three quarters of 2023, the company's sales expense ratio was 11.22%, down 0.63pcts year on year; management expense ratio was 10.39%, up 0.50pcts year on year; financial expense ratio was -0.81%, up 1.37pcts year on year; and R&D expense ratio was 15.40%, up 1.82 pcts year on year. Looking at a single quarter, 3Q23's gross sales margin was 51.59%, up 0.30pcts from the previous month. The main reason for this was the improvement in profits in the high-end consumer electronics and passenger car sectors.
The company's net cash flow changed significantly in the first three quarters of 2023. Net cash flow from operating activities was -0.04 million yuan, down 105.20% year on year; net cash flow from investment activities was -291 million yuan, up 23.95% year on year; and net cash flow from fund-raising activities was -0.06 billion yuan, up 75.28% year on year.
The balance of cash and cash equivalents at the end of the period was $181 million, down 36.18% year on year. Accounts receivable increased 24.34% year over year, and the turnover ratio of accounts receivable did not change much, from 1.71 in the same period in 2022 to 1.69. Inventories rose 8.15% year on year, and the inventory turnover rate did not change much, from 2.82 times in the same period in 2022 to 2.89 times.
The paint market has great potential in the future, and the company has achieved a vertical layout in three application areas. The company's coating material products can be divided into three categories according to different functions: coatings, inks, and adhesives. Downstream application areas mainly cover high-end consumer electronics mobile phones and related accessories, laptops and related accessories, wearable devices, smart home appliances, etc., as well as the field of interior and exterior components for passenger cars.
According to the company's 2023 mid-year report, the Asia-Pacific region is the most promising market for paints and coatings in the world, and China currently dominates the Asia-Pacific market, with great market potential. According to the “14th Five-Year Plan for China's Coatings Industry”, the total output value of China's paint industry is expected to grow to about 370 billion yuan in 2025, and the total output is expected to increase to about 30 million tons. Looking at specific market segments, although short-term smartphone shipments are sluggish, increasing product penetration in emerging markets such as Southeast Asia and India, and incremental markets brought about by new technologies such as 5G and folding screens will drive the long-term growth of the consumer electronics industry. In terms of notebook computers, the increase in the user base and the procurement demand for personal computers by the government and enterprises are expected to drive the continuous expansion of the laptop market. With the continuous development of technology and the continuous improvement of people's living standards, emerging fields such as wearable devices and smart home appliances are also expected to increase their contribution to the overall market. With the rapid development of new energy vehicles, passenger car coatings are also expected to usher in a period of rapid development. According to the company's 2023 mid-year report forecast, global electric vehicle sales will increase 35% year on year to 14 million units in 2023. China's electric vehicle sales will be more than 30% higher than in 2022, reaching about 8 million units, and market penetration rate over 35%.
From the supply side, there are structural problems with the production capacity of China's paint industry. The homogenization of middle- and low-end products is serious, competition is fierce, and the high-end paint market is mainly occupied by foreign-funded enterprises. According to the company's 2023 mid-year report, the top ten global coating materials companies in sales in 2022 were all foreign-funded enterprises, which accounted for nearly half of China's paint market share. The company broke the long-term technological monopoly of international giants in the fields of high-end consumer electronics and passenger car coatings, realized domestic substitution of key coatings, and established stable cooperative relationships with downstream enterprises. According to the company's 2023 mid-year report, in the field of high-end consumer electronics, the company has entered the supply system of many internationally renowned terminal brands such as major North American consumer electronics customers, Microsoft, Google, HP, Amazon, Meta, Logitech, Huawei, Honor, Xiaomi, VIVO, and OPPO. In the passenger car sector, through a differentiated competitive strategy, the company has established stable cooperative relationships with well-known domestic and foreign vehicle and auto parts suppliers such as North American T Company, BYD, NIO, Ideal, Geely, GAC, SAIC-GM-Wuling, Xiaopeng, FAW Hongqi, Valeo, Yanfeng International, Minshi Group, and Xinquan Co., Ltd. At the same time, the company actively enriches its product range and cooperates more deeply with downstream customers. According to the disclosure of investor relations notes on November 3, the company's light-emitting bumper coating and body repair paint projects are being carried out in an orderly manner. Among them, the light-emitting bumpers have already been designated and mass-produced for a Geely model. In terms of special equipment, the company is carrying out technical research in the fields of rail transit, aerospace, and marine equipment.
Based on the continuous expansion of the paint market, we are optimistic about the comprehensive layout of the company's paint products in high-end consumer electronics, passenger cars, and special equipment applications. We expect the revenue scale of the paint sector to grow further.
In terms of horizontal layout, the company has built an integrated product system and deepened cooperative relationships with downstream customers. Compared with other paint suppliers, the company is committed to building an integrated product system of “paint, ink, and adhesive”, which can meet customer needs for coating products based on different substrates, curing methods, coating performance, and environmental standards, and achieve customized production. At the same time, it can reduce the risk of compatibility between different product systems and further increase downstream customer stickiness. We are optimistic about the advantages of the company's integrated product system, which can enhance the stability of cooperation with downstream customers. At the same time, the continuous development of new sectors such as inks and adhesives will also contribute to incremental performance.
The company built a “iron triangle” for project operation and built a strong moat. In the paint industry, paint suppliers have dual customer relationships with terminals (automakers) and mold makers (auto parts suppliers), that is, products need to pass double verification between end customers and mold makers. The development certification cycle is long, and it needs to go through multiple stages.
According to the company's 2023 mid-year report, the company implements a project-based operation mechanism. The terminal service department personnel serve the terminal, and the model factory service department personnel serve the model factory. The two collaborate with each other to jointly promote the progress of project development and achieve efficient operation of the project. At the same time, the dual certification of “terminal certification” + “mold factory certification” has also created a certain market barrier. Downstream customers will not easily change paint suppliers due to cost and production stability considerations. We are optimistic about the company's project-based operation mechanism. Efficient collaboration between different service departments can speed up project development progress and help to quickly pass through the manufacturer's certification system. At the same time, the two-factor certification system also creates a strong moat for the company's existing business.
The company focuses on R & D investment and has rich R&D results. The company has established a complete scientific research platform, with “Hunan Matsui Research Institute”, “Guangdong Matsui Research Institute”, “Shanghai Matsui Research Institute”, and “Beijing Matsui Research Institute”, and has established a formula development laboratory, color center, CNAS laboratory, and program design department. The company continues to increase investment in research and development. According to the company's investor relations report on November 3, 2023, the company's R&D expenses increased by 21.22% year-on-year in the first three quarters of 2023, and the R&D expenses rate reached 15.40%. With the support of a perfect scientific research platform and high R&D investment intensity, the company has achieved many scientific research results. According to the company's 2023 mid-year report, the company has carried out forward-looking research and development of various new functional coating products. The comprehensive water-based research and development of existing solvent-based products can meet the complete replacement of solvent-based coating technology, and at the same time has basically completed the technology development and preparation of low-VOC oily products. Among them, the self-developed “low VOC water-based high performance UV coating” won the “2022 Jung Technology Innovation Award”. As of June 2023, the company has a total of 3 PCT internationally authorized patents, 94 nationally authorized invention patents, and 32 utility model patents. Series silicone hand feel coating technology, series PVD coating technology, series UV paint technology, series water-based paint technology, etc. are industry-leading or industry-advanced, and have formed large-scale production and sales power. As the earliest participant in the power battery insulation coating system solution industry, the company has obvious technical advantages. According to the company's 2023 mid-year report, the company's first-generation insulation coating materials were supplied in small batches to important strategic customers, and the first batch of digital intelligent coating equipment was successfully delivered and passed phased acceptance. This marks that the company has become the world's first “insulation coating material+digital coating technology” systematic solution provider for the power battery industry. We are optimistic about the company's intensive investment in R&D. The company's forward-looking layout in functional coatings will help drive the company's long-term development.
The company promoted project construction and continued to increase the field of automotive coatings. According to the company's feasibility analysis report for issuing convertible bonds, the company is building an automotive paint and special resin project in Youxian High-tech Industrial Development Zone, Zhuzhou City, Hunan Province. After completion of the first phase of the project, the company can achieve an annual production capacity of 30,000 tons of automotive paint and supporting special resins. We are optimistic about the construction and investment of the project, which is conducive to further improving and optimizing the company's existing industrial layout and business structure, and enhancing the company's competitiveness and brand influence.
Investment suggestions: We expect the 2023-2025 revenue of Matsui Co., Ltd. to be 601/8.56/1,182 billion yuan, up 20.34%/42.45%/38.20% year on year, and net profit of 0.87/1.45/215 million yuan, respectively, up 5.59%/67.50%/47.75% year on year, corresponding to EPS of 0.78/1.30/1.92 yuan, respectively. Combined with the company's closing price on November 20, the corresponding PE was 68/41/28 times, respectively. We are based on the following five aspects: 1) On the basis of the continuous expansion of the paint market, we are optimistic about the comprehensive layout of the company's coating products in high-end consumer electronics, passenger cars, and special equipment applications, and expect the revenue scale of the coatings sector to grow further. 2) We are optimistic about the advantages of the company's integrated product system, which can enhance the stability of cooperation with downstream customers. At the same time, the continuous development of new sectors such as inks and adhesives will also contribute to incremental performance. 3) We are optimistic about the company's project-based operation mechanism. Efficient collaboration between different service departments can speed up project development progress and help to quickly pass the manufacturer's certification system. At the same time, the two-factor certification system also creates a strong moat for the company's existing business. 4) We are optimistic about the company's high investment in R&D. The company's forward-looking layout in functional coatings will help promote the company's long-term development. 5) We are optimistic about the construction and investment of the project, which is conducive to further promoting the improvement and optimization of the company's existing industrial layout and business structure, and enhancing the company's competitiveness and brand influence. First coverage, giving a “buy” rating.
Risk warning: risk of raw material price fluctuations, risk of demand falling short of expectations, environmental risk, production safety risk