Key points of investment:

Zhishang Convertible Bonds (123191.SZ):

AA-, the balance of bonds was 699 million yuan, accounting for 99.98% of the total issuance amount, with a remaining term of 4.83 years. The latest closing price was 126.50 yuan, the conversion premium rate was 8.51%, the pure bond premium rate was 32.26%, and YTM -1.75%.

Original stock: Tomohisa Nanshan (300918.SZ):

The total market value is 3.9 billion yuan. The main business is professional clothing and worsted woolen fabrics, and the industrialization of new materials such as ultra-high molecular weight polyethylene fiber and nylon; as a collective enterprise, the Nanshan Villagers Committee holds 67.5% of the shares; the revenue in 2023 is 1.6 billion yuan, and the net profit to the mother is 203 million yuan.

The main highlights of Zhishang Convertible Bonds:

The underlying stock has had good historical performance and is not highly valued. The company's net profit from 2022 to Q124 was +22.5%, +8.53%, and +15.4% year-on-year respectively, with a steady increase in historical performance; the latest PE TTM 18.9x, compared with peers — New Australia, Taiwan, and Tongyi, etc., the valuation is low.

New business - price increase for ultra-high products: Ultra high molecular weight polyethylene fiber is widely used downstream, and the gap between international supply and demand has continued to expand in recent years. The company's 2020 layout has built a production capacity of 3,600 tons. On May 30, the Ministry of Commerce, the General Administration of Customs, and the Central Military Commission issued a joint document clarifying that only the fracture strength >=40cN/dTeX is restricted for exports. With the deregulation, prices for ultra-high consumer products in the same industry have begun to rise by 5,000 yuan/ton.

Relying on the 100,000 ton UHMWPE raw material production line to be put into operation by Nanshan Group Yulong Petrochemical, the company can guarantee the supply of raw materials for ultra-high products and has a cost advantage, which is expected to increase both revenue and gross margin.

Proposed additions to continue to explore the field of new materials. The company announced a fixed increase plan on June 3. It plans to raise no more than 1 billion yuan, mainly for a high-performance differentiated nylon filament project with an annual output of 80,000 tons. At present, the tender for the main equipment has been completed, and it is expected to be completed, inspected and put into operation by the end of this year. The nylon 66 series has high added value, has better wear resistance, tear resistance, flame retardancy, weight reduction, etc., and has broad room for growth, and is expected to become another performance growth point for the company.

The balance of various indicators of Zhishang Convertible Bonds: Zhishang Convertible Bonds were revised to the end on May 28. Indicators such as the latest market price, conversion premium rate, pure bond premium rate, and YTM are relatively balanced. The bond balance is small and the remaining period is long, which is a good allocation target for the original stock.

Reasonable valuation derivation for debt conversion

Based on the valuation model of Mountain Securities Convertible Bonds, we believe that the valuation of Zhishang Convertible Bonds can reach the 130-135 yuan range under the assumption that the underlying stock is optimistic.

Risk warning: competition in the main stock market is intensifying, downstream demand for new businesses falls short of expectations, etc.