A leading digital inkjet printing company, leading the market share of high-end inkjet printing equipment, Honghua Mathematics has been deeply involved in the industry for more than 30 years, and is a leading domestic industrial digital printing company. The company's main business focuses on the application field of textile digital printing industry. Looking at split products, the company's main products are digital inkjet printing equipment and ink. Among them, the digital inkjet printing equipment business had revenue of 612 million yuan in 2023, accounting for 48.69%, up 32.44% year on year; ink business revenue was 411 million yuan, accounting for 32.70%, up 8.17% year on year. The company's profitability is relatively good. Net profit in 2023 was 336 million yuan, up 34.02% year on year, and the net interest rate reached 26.70%. From 2017 to 2019, Honghua ranked first in sales of high-end textile digital inkjet printing machines in China, with a market share of more than 50%, and is a strong competitor and technology pioneer in the industry.

Digital printing has the dual advantage of “pattern+color”. It is expected to gradually replace traditional digital printing in terms of pattern and color richness, and has advantages that are difficult to achieve with traditional printing. On the pattern side, the digital printing machine can directly print complex patterns through the digital nozzle. When changing the pattern, the more complex the pattern, the higher the efficiency of digital printing; on the color side, traditional circular screen printing has certain limitations in color adjustment and color presentation, while digital printing can present more colors through intelligent blending of different inks, and has an extremely rich number of colors that can be presented. From a consumer perspective, the pursuit of high-quality clothing is a long-term trend. Leading companies in the clothing industry often take the lead in introducing new styles, new fabrics, and new patterns to gain consumers' attention. We believe that with the spread of digital printing technology, more garment companies will rely on digital printing machines to improve the color and pattern performance of textiles, and ultimately promote the penetration rate of digital printing machines in the field of garment manufacturing.

The current penetration rate of digital printing is low, and the 10 billion market is expected to gradually open up more potential development space for digital inkjet printing in China. In 2021, digital inkjet printing production in Asia and Europe accounted for 53.6% and 27.2% of the world's total output, but during the same period, the penetration rate of digital inkjet printing in Asia was lower than in Europe. The penetration rate of digital inkjet printing in Southeast Asia was about 4%, and the penetration rate of digital inkjet printing in East Asia was about 11%. Among them, the penetration rate of digital inkjet printing in China was about 11-12%, and there is huge room for development. We estimate that in the context of China's total printing volume remaining at 22 billion meters, when the digital inkjet printing penetration rate reaches 50%, the digital inkjet printing equipment market will reach 6.845 billion yuan, and the ink market may reach 7.92 billion yuan. The potential demand for the domestic digital printing industry exceeds 10 billion yuan, and the digital printing industry has broad room for development.

The company focuses on technology and R&D. New paint models broaden application scenarios. Honghua Mathematics has continuously increased R&D investment in recent years, boosting the company's new product launch through continuous R&D and innovation. In 2023, the company's R&D expenditure reached 90.1 million yuan, an increase of more than 50% over the previous year. Based on strong R&D capabilities, the company continues to launch new products. Among them, the EcoPrint paint digital printing machine launched in 2023 can achieve steam-wash-free printing, lower energy consumption and more environmentally friendly, effectively broadening the application scenarios of the company's products. Paint printing has strong versatility as a fabric material, and can be widely used in children's clothing, women's clothing, flags, and interior decoration fabrics and other textiles that require high printing quality. We believe that under the influence of multiple factors such as widespread application, environmental cost requirements, and digital transformation, the company's direct paint injection digital printing equipment may inject new impetus into the company's development.

Acquisitions and production expansion help reduce ink costs and increase efficiency, and integrated sales increase customer adhesive digital inkjet ink. It is an important accessory in the digital printing and dyeing process. Honghua Digital Technology is improving the competitiveness of ink products through acquisitions and construction of new production bases. The company acquired 67% of the shares of the ink raw material supplier Tianjin Jingli Digital Technology Co., Ltd. in 2023, thereby quickly entering the entire ink industry chain and mastering core technologies such as synthesis and purification of ink raw materials. In 2023, the company will build an integrated inkjet printing industry production line with an annual output of 47,000 tons of digital inkjet ink and 200 industrial digital inkjet printers in Tianjin. Large-scale production will continue to reduce costs. Currently, compared with domestic ink manufacturers, there is still room to catch up with the company's ink prices. We predict that with the implementation of new production capacity, the cost of the company's ink products will be steadily reduced and the cost performance ratio will further improve, thereby increasing the company's product market share and opening up a second revenue growth curve for the company.

Equity incentives were introduced in 2024 to bind core employees to achieve long-term value. In October 2023, Honghua Mathematics plans to repurchase 40 to 80 million yuan for equity incentives or employee stock ownership plans. The repurchase was completed in February 2024, with a total repurchase of 79.58 million yuan, corresponding to an average market value of about 11.066 billion yuan. In April 2024, the company launched a new draft employee stock ownership plan, which covers the company's core management and core technical employees. The draft performance assessment target is the company's net profit for 2024 and 2025. Among them, the net profit growth target for 2024 is 30% (corresponding net profit of about 43-440 million yuan), and the cumulative net profit growth target for 2024 and 2025 is 200% (corresponding to 2025 net profit of about 570 million yuan, yoy +31%). The introduction of this shareholding plan will effectively bind core employees, activate employees' motivation to work, and boost the company's performance.

Investment advice:

As one of the few companies in the digital printing industry with a high level of technology and strong R&D capabilities, the company's production capacity is expected to expand further, and the company's leading effect in the industry may gradually become prominent. In the future, it is expected that it will continue to benefit from technological innovation and equipment updates in the downstream printing and dyeing industry, and achieve a steady increase in market share. We forecast that the company's net profit for 2024-2026 will be $4.3, 5.5, and 690 million yuan respectively, corresponding PE will be 30X, 23X, and 18X, and the six-month target price will be 124.25 yuan, which is equivalent to 35 times the dynamic price-earnings ratio in 2024. The first coverage gave a “Buy-A” rating.

Risk warning: The recovery in clothing demand falls short of expectations; industry technology changes too fast; profit forecasts fall short of expectations.