Key points of investment:
Honghua Mathematics: A leading domestic digital printing equipment company. The equipment and ink gender promotion company is a leading domestic digital printing equipment company, with a domestic market share of over 50%, ranking in the top three in the world. The company expanded ink supply on the basis of equipment, and the two promoted each other well, further enhancing the company's overall market competitiveness. The company's performance growth is stable and profitability is strong. The compound growth rates of revenue and performance in 2017-2023 were 28.24% and 23.86% respectively. In 2023, the company's revenue was +40.65% YoY, and the performance was +33.84% YoY. The company's gross margin is stable and remains above 40% year-round. The gross margin in 2023 was 46.5%, and the 2024Q1 gross margin was 45.63%.
There is plenty of space for digital printing equipment to replace traditional equipment, and it is expected to accelerate growth. Under the trend of fast fashion and low inventory of clothing brands, the “small order quick reverse” model is developing rapidly. On the one hand, digital printing perfectly adapts to this industry trend; on the other hand, its processing costs have also been reduced to the level of traditional printing and dyeing. In addition, it also has environmental protection and other advantages, and digital printing is expected to accelerate development. We predict that the digital printing penetration rate will increase from 11.4% in 2021 to 27% in 2026, and the equipment market space is expected to reach 11.3 billion in 2026. The ink market is developing simultaneously with digital printing, and the domestic market space is expected to reach 3.2 billion. As a leader in inkjet printing equipment, the company's position in the international market is steadily improving, and it is expected to benefit deeply from the wave of digital inkjet printing equipment replacement.
The company's product strength maintains global leadership, and the industrial chain extends vertically and horizontally
The company actively lays out to upstream industries such as ink and consumables; expands sewing and other links downward, acquires TEXPA GmbH, a German automated textile sewing equipment company, to open up a flexible textile supply chain; and horizontally expands the application field to other technical fields such as book packaging and printing, decorative building materials finish printing, electronic printing, and 3D printing.
Profit forecasting and investment advice
We expect the company's 2023-2026 revenue CAGR to be 26%, net profit CAGR to mother of 27%, and EPS of 3.56 yuan, 4.46 yuan, and 5.56 yuan respectively. Using the comparable company valuation method, the average PE ratio for comparable companies in 2024 was 33 times. We believe that the company is in an industry with a low penetration rate of digital printing equipment and is expected to usher in a period of rapid growth. Companies with the same logic of increasing penetration rate have an average PE of 40 times, so the company is given a certain premium, 35 times PE, corresponding to a target price of 125 yuan, which is covered for the first time and gives a “buy” rating.
Risk warning
International trade risks; risk of reliance on outsourcing of core components; industry development falls short of expectations.