We maintain our target price of HK$4.30 and reaffirm our “buy” rating. We maintain our 2023-2025 earnings per share forecast of HK$0.581/HK$1.136/HK$1.489, corresponding to year-on-year growth rates of (58.5%)/95.3%/31.1%, respectively. We maintain our target price at HK$4.30, and our price-earnings ratio for 2023/2024/2025 is 7.4 times/3.8 times/2.9 times, respectively.
Scientific and Cultural Industries (the “Company”) is a beneficiary of accelerated market consolidation. Since 2024, with the exception of some polymer material products such as polytetrafluoroethylene, the prices of other major products of the chemical industry have declined. Among them, the cumulative year-on-year declines of caustic soda, methylene chloride, and hydrogen peroxide have been 2.3%, 7.6%, and 6.7%, respectively.
Although the company's short-term profits may be affected, falling prices will eliminate smaller, heavily indebted companies and accelerate market integration. As of the first half of 2023, the company's balance ratio was very low, at only 9.8%, and occupied an important position in the Jiangsu and Jiangxi markets. We expect the market share of Riken Cultural Industries will gradually expand as weaker companies withdraw from the market and acquire smaller enterprises.
Actively expand the new materials business. After completion in 2025, the Jiangxi expansion project can produce 10,000 tons of lithium hexafluorophosphate (LiPF6), 20,000 tons of polyvinylidene fluoride (PVDF), and 50,000 tons of supporting hydrogen fluoride products per year. Furthermore, the 3,000 ton/year fluorovinyl carbonate (FEC) plant in Zhuhai, which is scheduled to be completed in two phases in 2024 and 2025, will significantly increase its production capacity for lithium-ion battery electrolyte additives. We anticipate that when fully put into production, these products will bring the company an additional revenue of RMB 3.3 billion at current market prices.
Catalysts: 1) Accelerated market consolidation may increase the company's market share; 2) The company's new materials projects will be put into operation in 2024 and 2025.
Risk warning: 1) Due to a sharp increase in production capacity, there may be fierce market competition in the next few years; 2) Advances in battery technology may have a profound impact on the demand for the company's products.