Key points of investment
Growth Drivers: Price or Volume? Since 2022, there has been a sharp rise in volume and price. (1) Price: On the one hand, structural product upgrades may contribute continuously to price increases, and on the other hand, they have strong bargaining power and price increase ability for existing products. (2) Sales volume: With the recovery in terminal demand, capacity utilization has also recovered, and the gradual implementation of production expansion plans such as initial fund-raising projects, convertible bond projects, and Malaysian projects will also effectively expand the company's production capacity.
Demand market: where did it grow? The global scale of sunscreen exceeds 50,000 tons, and the growth is driven by a shift from the European and American markets to the Asia-Pacific market. The growth rate of the sunscreen market in China is leading the world, and the sunscreen market is growing faster than skincare products as a whole, and there is plenty of room for improvement in penetration rate. From a price perspective, the application of new sunscreen agents with higher average prices in sunscreen products is expanding, driving the overall average price of sunscreen also showing an upward trend.
Downstream customers: What kind of demands? Based on brand reputation and the abundance of cosmetic ingredients, downstream brand customers attach great importance to raw material safety & production quality control, and prefer raw material vendors with multiple supply capabilities. From the perspective of cost structure, sunscreen accounts for a very low proportion of downstream customer terminal product costs (we expect less than 1%), and downstream brands are relatively less sensitive to the price of sunscreen raw materials.
Supply Barriers: Why Build Too High? The company has advantages in production and quality management systems, which can meet the high standards of customers. The company's products are mainly supplied to large domestic and foreign customers with high requirements such as quality control and patents, to provide high-quality and inexpensive products. Small raw material manufacturers are not comparable to the company in terms of customer size, product quality, price, etc.
Company characteristics: cycle & growth? Since its establishment more than 20 years ago, the company's business has continued to develop by leaps and bounds, and has achieved remarkable growth. The goal is to become a global leader in personal care ingredients. Moreover, based on the high market share of the category and the fact that downstream customers are less price sensitive, there is limited price fluctuation for individual products. Overall, we believe that the growth attributes of the company far outweigh the cyclical attributes. In April 2023, the company announced an equity incentive plan. The performance assessment targets are divided into three levels, corresponding to the 2023-2025 revenue CAGR of not less than 30%/28%/25% compared to 2022, respectively.
The equity incentive plan is conducive to binding the interests of core employees and promoting the better implementation of development strategies.
Profit forecast and investment rating: The company is a global leader in scarce cosmetic ingredients. Demand is strong and new categories are launched quickly, driving continued high growth in performance. We maintained net profit to mother of 9.3/11.8/1.46 billion yuan from 2024 to 26, and net profit from 2024 to 26 increased 26%/27%/24%, respectively. The current market value corresponds to the 2024-26 PE of 15x/11x/9x, corresponding to the current market value, which is 15x/11x/9x, maintaining a “buy” rating.
Risk warning: fluctuating raw material prices, loss of important customers.