Investment advice
Benefiting from the expansion of coating applications; the expansion of aramid business production has accelerated; and the spandex business has basically bottomed out. We raised our target price by 17% to 21 yuan and raised our rating to “outperform the industry”.
The reasons are as follows:
The aramid coating has been completed from 0 to 1, and a new growth curve has been formed. Compared with traditional coating materials such as boomite, aramid coated diaphragms have excellent properties such as low specific gravity, high strength, puncture resistance, oxidation resistance, good insulation, and good compatibility with electrolytes. With the advantages of independent research and the integration of the aramid industry chain, the company has achieved stable operation of a 30 million flat/year aramid coated diaphragm pilot line. According to the investor exchange notes recently disclosed by the company, the company's aramid coated diaphragms has begun to receive small-batch orders. We believe that the company's aramid coated diaphragm shipments are expected to grow rapidly in 24, creating a new growth curve for the company.
Aramid production capacity is expanding steadily, and performance may decline further periodically. As of 3Q23, the company's nominal production capacity of aramid/para-aramid was about 1060/0.95 million tons/year, ranking first in the country. Looking ahead, we expect that with the gradual implementation of the company's proposed and ongoing aramid production capacity, the company's production capacity of aramid and counteraramid is expected to exceed 20,000 tons/year within the next 3 years. Considering the relatively stable gross margin of the aramid business, we believe that the increase in the revenue scale and profit contribution of the aramid business is expected to gradually reduce the cyclical impact of fluctuations in the spandex industry on the company's performance.
The spandex business has basically bottomed out, and there is upward elasticity. There is still a gap in the profitability of the company's spandex business compared to industry leaders. We think the main reason is that the operating rate of the company's Ningxia base has not reached the ideal level. Looking ahead, as the operating rate of the company's Ningxia base gradually increases and the ratio of self-supply of raw materials increases, there is still some room for improvement on the cost side of the company. Furthermore, judging from the spandex price spread situation (as of November 24, the spandex price spread is 2% since 2010), we believe that the prosperity of the spandex industry has basically bottomed out. If industry demand improves, the company's spandex business may still have some room for improvement.
What is our biggest difference from the market? The market is concerned about large fluctuations in the company's performance, and we believe that as the scale of the aramid business expands, the company's profitability and stability are expected to improve significantly.
Potential catalysts: The aramid coating market is being promoted at an accelerated pace; recovery in demand drives improved profits for spandex.
Profit forecasting and valuation
We have basically kept the company's profit forecast for 2023/2024 unchanged. The current stock price corresponds to 20xP/E in 2024, but considering the potential profit improvement of spandex in the 2024 aramid coating business or economic recovery, we upgraded the company rating from “neutral” to “outperforming the industry”; considering that the company's aramid coating business realizes or positively catalyzes the company's valuation, we raised our target price by 17% to 21.0 yuan, corresponding to 28x P/E and 36% upward space in 2024.
risks
The popularity of spandex declined further; the promotion progress of aramid coating fell short of market expectations.