Guide to this report: Dragon Star Convertible Bonds was listed on March 6. The reasonable pricing range is expected to be 106-109 yuan after listing. It is recommended to pay active attention after listing.
Summary:
It is one of the leading carbon black companies in China. Production and sales are strong, and production capacity needs to be increased urgently. Longxing Chemical focuses on the carbon black field and is one of the major domestic carbon black manufacturers. In 2022, the company's carbon black production volume reached 465,900 tons, ranking third in the output of China's key carbon black enterprises in 2022. The company's products are mainly used in the production of rubber products such as tires. As of the first three quarters of 2023, Longxing Chemical had a carbon black production capacity of 420,000 tons. The output for the first three quarters of 2020-2023 reached 43.2, 46.9, 46.6, and 358,000 tons respectively, with a capacity utilization rate of over 100%. At the same time, the company's sales volume during the same period was 44.1, 45.6, 46.8, and 369,000 tons, respectively, and the production and sales rate was close to or above 100%.
As the strong trend of production and sales continues, the company's production capacity needs to be increased urgently.
The increase in export sales ratio in 2022 led to a higher level of profit leading the industry. Before the Russian-Ukrainian war, about 50% of Europe's total carbon black production capacity came from Russia, Ukraine, and Belarus. Since 2022, supply chains in some regions have been blocked, and exports from domestic manufacturers have become an alternative source. Before 2021, most of the company's overseas sales were in Southeast Asia, and the gross margin of export sales was basically the same as domestic sales. After 2022, the company increased its export sales to Europe, and its core customers were internationally renowned leading companies such as Continental Mart and Michelin. The gross margin of export sales increased significantly, and contrary to the trend of domestic gross margin changes. This made the gross margin of the company's carbon black products clearly ahead of peers during Q1-3 in 2022 and 2023.
Industry concentration is expected to increase further. In 2021, China's top five carbon black companies accounted for 42.57% of the country's output. Compared with the situation where CR5 exceeded 98% during the peak carbon black production capacity in the US in the 1960s, the overall industry concentration is still relatively low. However, as China's entry conditions and environmental requirements for the carbon black industry gradually increase, backward production capacity within the industry will be cleared at an accelerated pace. With the continuous deepening of supply-side reforms, production capacity in the carbon black industry will gradually be concentrated in advantageous enterprises, and the bargaining power and profitability of leading enterprises in the future industrial chain are expected to increase.
Debt bottom protection is average, and the estimated price on the first day of listing is 106-109 yuan. Based on the calculation of the closing price of Dragon Star Chemical at 4.48 yuan on March 1, 2024, the corresponding conversion value of Dragon Star Bonds was 73.08 yuan. Based on the 6-year AA- China Securities corporate bond maturity yield of 5.438% as the discount rate, the value of pure bonds is 87.29 yuan, and the yield to maturity of pure bonds is 3.12%, and debt bottom protection is average. The downdraft clause is (15/30, 85%), the conditional redemption clause (15/30, 130%), and the conditional resale clause (30, 70%). The three major terms of foreclosure, downdraft, and resale are consistent with the mainstream of the market.
Among stock conversion bonds, the average conversion premium rate is 70-80 yuan, the balance is 600 to 10 billion yuan, and the average conversion premium rate for AA-rated bonds is 48%. It is estimated that the reasonable conversion premium range for Dragon Star Bonds on the first day of listing is [45%, 50%], and the price is 106-109 yuan. It is recommended to pay active attention after listing.
Risk warning: The risk of raw material price fluctuations, competition increases the risk of overcapacity, the risk of exchange rate fluctuations, project construction falls short of expectations, the price of new securities falls short of expectations, and the price of the original stock fluctuates.