Incident: On June 7, the company announced a major asset purchase plan for Orikin Technology Co., Ltd. The company plans to issue a voluntary conditional comprehensive offer to all shareholders of COFCO Packaging, a company listed on the Hong Kong Stock Exchange, to purchase all issued shares of COFCO Packaging in cash. The overall transaction consideration limit is HK$6.066 billion, or approximately RMB 5,524 billion.

The plan is to acquire COFCO Packaging to strengthen its competitive advantage and optimize the supply pattern. The company is planning an acquisition project for COFCO Packaging, another leading metal company. Currently, it indirectly holds 24.40% of the shares, and plans to acquire all of COFCO Packaging's issued shares in cash. On June 6, 2024, Mr. Zhang Wei (holding 245 million shares of COFCO Packaging, accounting for about 22.01% of COFCO Packaging's issued shares) entered into an irrevocable commitment with the company. Mr. Zhang Wei unconditionally and irrevocably agreed and promised to accept the offer for all of his COFCO Packaging shares before the final acceptance date of this offer, and promised not to withdraw the acceptance. COFCO Packaging's main products include three-piece cans and two-piece cans, with total revenue of 10.265 billion yuan in 2023.

According to Forward-Looking Economist data, Orekin and COFCO Packaging's share of the two-piece can market in 2022 were 20% and 17%, respectively. COFCO Packaging's profit level was steady, with gross margin of 15.64% and net margin of 4.73% in 2023, which is close to Orekin's profit level. If the acquisition is successful, the company's share of the two-piece can market will nearly double, and the three-piece can market share will further increase, enhance scale effects, collaborate with R&D and innovation, supply chain introduction, and customer resources to strengthen premium capacity. Asset size, revenue scale, and long-term profitability are expected to increase significantly. Since 2023, the capital expenditure growth rate of leading metal packaging companies has slowed, and the industry continues to consolidate. If the merger and acquisition is successful, industry concentration will increase significantly, and profitability is expected to continue to recover.

The downstream boom is expected to recover. Raw material prices for three-piece cans have continued the downward trend. Consumption of metal-packaged downstream beverages and alcohol has continued to recover since 24Q1. According to Wind, retail sales of beverages, tobacco and alcohol in April increased 8.71% and 11.86% year-on-year respectively, respectively, and the growth rates have all increased month-on-month. Looking at downstream categories, 1) Consumption has continued to recover weakly since April. Combined with heavy rainfall in the south and hot weather, pressure on the beer market still exists. National beer production fell 9.1% year on year in April. The 2024 European Cup will be held in Germany from June to July, and the Olympics will be held from July to August. It is expected to drive demand for beer, and sales are expected to improve marginally. The beer market base was low in July and August '23, and when entering the peak summer season, the boom is expected to pick up and drive the growth rate to an inflection point. 2) Soft drinks are recovering rapidly. In April, the country's soft drink production increased 9.7% year on year, and the growth rate increased month-on-month. 3) New energy drinks are catalyzed, and the overall industry is recovering steadily. In addition, the high-end upgrading of the beer industry is progressing smoothly, the Q1 middle and high-end structure has been further improved, and the overall profit level of leading companies has increased, which is beneficial to the increase in the upstream canning rate and upgrading to the high-end of new can types. The company has significant advantages in innovative R&D technology. It continues to develop new tank types such as integrated aluminum cans, shell cans, and bowl cans. At the same time, it uses a “follow-up” production layout model to be close to core customers, and its market share is expected to continue to increase.

In terms of raw material prices, the price of tinplate, a three-piece can, fell further from month to month. According to wind data, the price of tinplate rolls decreased by 7.13% and 5.86% year-on-year, respectively, in April and May. The price of aluminum, the raw material for two-piece cans, rebounded. According to wind data, aluminum prices increased 13.52% and 3.33% year-on-year respectively in April and May. The capital expenditure growth rate of leading metal packaging companies has slowed significantly since 23 years, and the industry's supply and demand pattern is stable. We expect the company's current product prices to remain resilient, which is expected to benefit from the decline in raw material prices.

Explore the layout of new energy projects and actively develop the second growth curve

The company has efficiently built a model production line for first-class new energy battery structural parts in Zaozhuang, and has mass production capacity for new energy battery case structural parts. Currently, the company is actively developing new energy battery customers, obtaining production line acceptance and supplier approval for strategic battery customers, and providing batch testing. The precision structural components of new energy batteries themselves are an extension of metal packaging products in the field of power batteries. In the field of metal packaging, the company already has advantages such as mature automated large-scale manufacturing capabilities, weight reduction and cost reduction capabilities, process innovation and optimization capabilities, and product quality control capabilities. It is expected that it will also use its own superior technologies such as mountain-shaped structural parts, double roll sealing technology, and coated iron technology to improve quality, reduce costs and increase efficiency for potential customers.

Investment suggestions: The two-piece can industry pattern is gradually improving, the company continues to strengthen the integration of “canning and filling”, and is actively extending the “packing+” strategy for industrial chain development, and the development momentum is good. We expect Orekin's revenue for 2024-2026 to be 152.26, 170.19, 18.867 billion yuan, up 9.99%, 11.77%, and 10.86% year on year; net profit to mother will be 9.29, 10.79, and 1,261 billion yuan, up 19.91%, 16.14%, and 16.95% year over year, corresponding PE is 12.3x, 10.6x, 9.0x, and a target price of 5.80 yuan for 24 years, maintaining a buy-A investment rating.

Risk warning: Red Bull dispute risk; raw material price fluctuation risk; customer food safety risk.