Key points of investment:

After a few twists and turns, it focuses on the pet hygiene and care products segmentation circuit. The company began producing hygiene products in 1998. As competition in the domestic sanitary napkin market became more intense, the company valued the high growth of pet racetracks and the scarcity of domestic production capacity, and began to focus on pet health care products tracks. Currently, the company has thousands of specifications and models of products. The company cooperated with ITO for the first time in 2004, and since then it has gradually gained major international customers such as Walmart and PetSmart, covering Japan, South Korea, the United States, Europe and other regions. In 2020-2022, the export value of the company's disposable pet hygiene care products accounted for 36%/37%/38% of the domestic export value of similar products, respectively, leading the market share in the industry. In 2022, we achieved revenue of 1,516 billion yuan, an increase of 15.75%, and a 4-year CAGR of 13.82%.

Awareness of scientific pet care has increased, and the scale of the pet products market continues to expand. Pet hygiene products are a pet products segmentation circuit. They have rigid characteristics. The global pet products market is expanding significantly. The United States is the largest consumer. The pet penetration rate continues to increase, and the pet breeding community is becoming younger, further freeing up room for growth in terms of quantity. In terms of exports, overseas inventory removal has ended, and the normal inventory replenishment cycle has arrived. We believe that in 24Q1, exports of this type of product are expected to maintain high growth, and the company's export business is also expected to achieve strong recovery; domestically, the market is still under cultivation, and the penetration rate can be expected to increase. As pet breeders increase their hygiene awareness and environmental comfort requirements increase, pet breeders' demand for pet hygiene products will continue to rise.

Customers expect stable and superimposed production capacity release, and profit elasticity is expected during the period of declining costs. 1) R&D: The company and customers join forces to form a healthy closed loop of R&D to establish a complete product system to achieve high quality and efficient production; 2) Industrial chain integration: The company incorporates non-woven fabric production into the industrial chain system to control raw material and product quality, stabilize cost fluctuations, and can also sell abroad to make full use of production capacity. Currently, raw material prices have entered a downward channel, and we expect the company to fully unleash profit flexibility at this stage; 3) Customers:

Old customers have plenty of endogenous growth momentum, and new customers continue to accumulate. According to the company's announcement, new customers contributed about 48 million yuan in revenue up to the first three quarters in '23; 4) Production capacity release: Fund-raising projects eased the company's production capacity bottleneck. As of February 2, 2024, the company's pet pad/pet diaper production capacity reached more than 50/200 million pieces, and the new production capacity was put into operation to provide the company with new growth momentum.

Profit forecast and investment suggestions: The company is a leading pet disposable hygiene products company in China. Its business includes OEM business and its own brand business. The products are diverse. We chose Haoyue Care, Zhongshun Jierou, Tianyuan Pet, and Yuanfei Pet as comparable companies. The average PE of comparable companies in 2023-2025 was 22/17/14 times, respectively. The company's net profit due to mother in 2023-2025 is expected to reach 130.171/194 million yuan, a year-on-year increase of -13.64%/31.58%/13.16% over three years. Based on the fact that the overseas OEM business ushered in an inflection point, the company's fund-raising project was put into operation to release production capacity and the smooth expansion of new customers. The company was given 18 times PE in 2024, corresponding to a target price of 16.65 yuan/share, and for the first time, coverage gave the company a “buy” rating.

Risk warning

Risk of a sharp rise in raw material costs in the short term, overseas market recovery falling short of expectations, risk of exchange rate fluctuations, risk of developing new customers at home and abroad falling short of expectations, risk of domestic market competition