Investment highlights
For the first time, it covered innovative new materials (600361) and gave it a rating of outperforming the industry, with a target price of 5.60 yuan. The company has strong growth and certainty, and enjoys a certain valuation premium, corresponding to 17 times P/E in 2024. The reasons are as follows:
The advantage of scale is remarkable, and “scale+technology” enables high-end transformation. The company is a leading manufacturer of aluminum bars and recycled aluminum in China. In 2022, the company sold 2.91 million tons of aluminum bars, and the global share of aluminum bars was 8.8%, ranking first. The company has four major competitive advantages: cost advantage, the company benefits from scale effects, industrial clusters and scale of use of recycled aluminum; product advantages, large scale, full range of products, rapid response and delivery capabilities, and strong product stability and consistency; customer advantage, the company has more than 2,000 downstream customers, and the company has deep cooperation with leaders in the automotive sector such as BMW, Ling Yun, 3C electronics, Apple in the field of new energy, and Ningde Era, and is expected to grow together; Technical advantages, the company has full experience in the formulation and process of aluminum rod/foil/aluminum pole cable/profile/recycled aluminum 3C R&D cooperation in high-end fields such as electronics continues to deepen.
In line with the development trend of demand, high-end technology nurtures growth potential. First, the company's production capacity is growing rapidly, and the trend of high-end development is obvious. As of 1H23, the production capacity corresponding to the company's aluminum bar/strip foil/profile/recycled aluminum construction project is about 130/38/16/1 million tons; in addition, the company plans to build 3C and automobile profile projects in Vietnam and Mexico, and we expect to contribute 100,000 tons of profile production capacity respectively, and high-end production capacity has increased significantly. Second, the company has a high gross margin of profiles, strips, and foils, and profits are expected to grow at an accelerated pace. In 2022, the company's gross profit per ton of profiles reached 6,383 yuan, which is significantly higher than other businesses. We expect the gross profit of the company's profile, plate, and foil to increase to 1,300 million yuan and 670 million yuan respectively in 2025, accounting for 53% of the total gross profit, compared to +9ppt in 2022.
Firmly lay out recycled aluminum, and “cost reduction and downgrading+green and low carbon” strengthen competitive advantage. Looking at industry trends, China's supply-side reforms restrict the expansion of electrolytic aluminum production capacity. Furthermore, China's scrap aluminum supply is expected to peak, and superimposed recycled aluminum policies continue to be clarified. We believe that China's recycled aluminum industry is expected to accelerate development. In terms of competitive advantage, recycled aluminum has two major advantages: carbon reduction and green premium. Single-ton recycled aluminum production reduces carbon by about 95% compared to raw aluminum production. Downstream 3C electronics and automobile leaders have clear carbon reduction requirements, and the desire to use recycled aluminum/low-carbon aluminum is strong. The company has outstanding application capabilities for recycled aluminum upgrades, and has a long-term target of 2.05 million tons.
What is our biggest difference from the market? The market is mostly focused on the expansion of the company's production capacity. We believe it is necessary to pay attention to the competitive advantage brought by the company's “scale+technology” and the “high-end and low-carbon aluminum” development strategy. With the release of the company's high-end production capacity in the future, the company's profits are expected to grow at an accelerated pace.
Potential catalysts: The company's automobile and 3C profile production capacity was put into operation; processing costs and orders increased as demand picked up.
Profit forecasting and valuation
We expect the company's 2023-2025 EPS to be 0.24/0.32/0.42 yuan, respectively, compared to 2022, with a CAGR of +19%. The company is in the transformation and upgrading stage. Considering the company's growth and certainty, we believe that the company can enjoy a certain valuation premium, cover the “outperform the industry” rating for the first time, and determine the target price of 5.60 yuan, corresponding to 17 times P/E in 2024, with +18% room for growth.
risks
Production capacity expansion falls short of expectations; market demand falls short of expectations; raw material prices fluctuate greatly.