Key points of investment

Demand for three-piece cans has been repaired, and production capacity has improved. With the steady growth of Tencel Red Bull, the company's three-piece cans are used to package various beverage products, including vegetable protein drinks, energy drinks, rice cake, food cans, etc. In '23, with the recovery of downstream demand and the steady growth of its core customer, Thai Tencel Red Bull, the company achieved double-digit growth in sales. In terms of production capacity, the company continues to optimize the three-piece tank production capacity layout. In the fourth quarter of 2023, it invested in the construction of a production base in Neijiang to support strategic customers.

Tencel Red Bull: According to current tracking, on the one hand, the energy drink market ushered in steady growth along with outdoor scene restoration. According to Euromonitor data, China's energy drink sales volume was 2,602 billion liters, -1.31% year over year, while sales reached 2,867 billion liters in 23, +10.2% year over year. On the other hand, Tencel Red Bull showed strong growth in new product launches & channels. According to the FoodTalks list, 2023Q1 Tencel Red Bull Vitamin Drink 250ml ranked fourth in sales in North China. Reaching 3rd place, Red Bull Vitamin Taurine Drink 250mL also rose from 6th place to 5th place, and the market share is steadily increasing.

Yangyuan: The basic market for walnut milk is stable. According to Immediate Win data, the market share of the six walnut vegetable protein drink brands exceeded 20% during the New Year period, and their share in 23 years increased slightly compared to '22. The basic market market is stable, and it is expected to grow steadily as the downstream consumption scenario is repaired.

The two-piece tank is under pressure domestically, and overseas demand is full

Domestic: Demand growth in China's two-piece can industry slowed in 2023, and overall domestic demand was under pressure. According to Euromonitor data, China's beer canning rate in '23 was 30.8%, +0.9 pct year on year, while beer production was 30.66 billion tons in '23, which is basically the same as year on year. With a steady demand side, there is excess production capacity on the supply side. According to joint research and industry consulting, the total production capacity of two cans in China was 62.5 billion cans. We tracked Baosteel Packaging's first phase of production in Anhui + Guizhou with a total production capacity of 2.4 billion cans in 23, Jiamei Packaging put into production capacity of 1 billion cans in Yingtan, Orekin put into production capacity of 900 million cans in Zaozhuang, and increased production capacity by some Longtail companies. Under the imbalance between supply and demand, the company continued to promote customer expansion and product innovation to achieve single-digit growth in domestic sales.

Overseas: The company's two-piece cans are in high demand in overseas markets. In '23, the company achieved revenue of 763 million yuan, +5.55% year-on-year under capacity restrictions, gross profit margin of 19.3%, and +3.8pct year-on-year. The successful completion of the company's Phnom Penh Shengxing Phase III project in '23 is expected to lay a good foundation for overseas business growth in 24 years.

Industrial integration is progressing in an orderly manner, and the profitability of the industry is expected to gradually recover the CR4 of the two-piece can industry in '22, including Orekin 22%, Baosteel Packaging 18%, COFCO Packaging 17%, and Shengxing shares 16%. Currently, Orekin and Baosteel Packaging's parent company Baowu Group are planning to acquire COFCO Packaging. Whether Baosteel or Orikin acquires COFCO Packaging, they will promote an increase in industry concentration. Throughout the history of the two-piece can industry, the profitability of the industry is currently at the bottom of history. Taking Baosteel packaging as an example, historical tank prices have remained at the bottom of history due to fluctuations in raw material prices. 0.37- 0.54 yuan, while the gross margin side gradually declined from 19.09% in 2012 to 9.51% in '23. Looking forward to the future, we believe that as industry integration progresses, the bottom of the industry is gradually being established. Compared with overseas leaders Crown and Pol Mau interest rates of around 20%, the profitability of the industry is more flexible. However, the pace of improvement still needs to keep up with the progress of acquisitions and Baosteel's business attitude.

Downstream scenario repair, aluminum bottle profit contribution is flexible

The aluminum bottle consumption scene is mainly offline. Demand has been repaired and sales are picking up. Aluminum bottle customers are mainly high-end beers, and the main applications are offline drinking channels, especially nightclub scenes. Demand has fluctuated clearly in recent years due to repeated effects of the sanitary environment. Currently, demand has been repaired, driving a recovery in sales. Currently, the company's aluminum bottle production capacity is about 240 million cans. As downstream demand recovers, capacity utilization is expected to rise and profitability will improve.

Profit forecasting and investment advice

We expect the company to achieve revenue of 79.7/89.5/9.7 billion yuan in 24-26, +12%/11% year-on-year, and achieve net profit of 4.8/57/ 650 million yuan, respectively, +45%/18%/15% year-on-year, corresponding to PE 11/9/8X, maintaining the purchase rating.

Risk warning

There is a risk of raw material price fluctuations, mergers and acquisitions falling short of expectations, and competition increasing the risk.