Investment highlights

For the first time, Changhai shares (300196) were given an outperforming industry rating. The target price was 14.60 yuan. Based on comparable company valuation methods, it corresponds to 24/25e 19/13x P/E. The reasons are as follows:

Since March, glass fiber has shown a price increase in the stock market. The signs that the industry is bottoming out are clear, and profits are expected to recover.

At the end of March and mid-late April to early May, major glass fiber manufacturers raised prices for mainstream products twice; in early May, some companies' direct yarn 2400tex tax-inclusive prices increased by at least 700 yuan/ton compared to the end of March.

The industry's inventory fell to 600,000 tons at the end of April, and the price increase has already achieved phased results. We estimate that the net production of thick yarn in the industry may reach 500,000 tons in 24 years. The relative balance between supply and demand is expected to support the return of industry prices to normal. Compared with the second and third tier, the leader is expected to maintain a net profit of 500-1000 yuan in excess tons.

Focus on the Changhai Sea: The products are strong, and the core places to go overseas have tax rate advantages. We believe that the profit volatility of products is less than that of thick yarn, and the turnover speed is faster. The company's core products are short cut felt, wet thin felt, etc. Among them, lightweight and heavy cut felt is used for car roofs, and the high-performance glass fiber yarn short cut felt technology was recognized by the Ministry of Industry and Information Technology as the single champion in the manufacturing industry. In terms of overseas sales, overseas revenue accounts for 20% to 30%. Some products exported to the EU are subject to a total anti-dumping and countervailing duty rate of 4.9%, and the total tax rate of peers is over 20%. When the industry experienced a long downturn and bottom out cycle in 22-23, the company proved its profit advantage: we estimate that the company's consolidated net profit per ton in 23 years was more than 900 yuan (including exchange profit and loss).

Promote the commissioning of a new 150,000-ton line to co-exist with volume increase and cost reduction. The company plans to build a 600,000-ton intelligent base, of which the first phase of the 150,000-ton production line will be launched in 2024. Volume increase: We estimate that the company's sales growth rate of glass fiber and products is expected to remain above 10% in 2024, and sales will be more elastic or more significant after releasing production capacity throughout 2025; cost reduction: due to 1) equipping a powder mill (or reducing the cost per ton by 100-200 yuan); 2) the per capita output is expected to further increase from 200 tons/person; 3) the company will continue to promote cold modification of old kilns in the future. We determine that the overall cost per ton is expected to decline steadily.

The balance ratio is 30% lower than that of its peers, and in the era of high capital expenditure, it went into battle lightly. By the end of 2023, the company's net operating cash flow was 720 million yuan, with a revenue ratio of 85% and a balance ratio of 30% lower than that of peers. We judge that the company's first three production expansions were combined with various financing methods such as IPOs, additional issuance, and convertible bonds. The financial leverage ratio is low, and there is still room to support subsequent capacity expansion in the future.

What is our biggest difference from the market? The market is more concerned about sales elasticity brought about by the company's new production capacity, and we are more concerned about the company's profitability.

Potential catalysts: The restoration of supply and demand for thick yarn boosts prices, the release of the company's 150,000 tons of new line capacity, etc.

Profit forecasting and valuation

We expect the company's 24-25 EPS to be 0.77 yuan and 1.10 yuan respectively, and the CAGR will be 23%. The current stock price corresponds to 24e/25e 16/11x P/E. We covered Changhai shares for the first time and gave them an outperforming industry rating. The target price was 14.6 yuan, corresponding to 24/25e 19/13x P/E, implying 20% upward space.

risks

The industry's supply and demand pattern deteriorated, overseas trade protectionism, and the company's new line of operation fell short of expectations.