Changhai Co., Ltd.: Glass fiber industry leader with a full industrial chain layout

Integrated layout of the industrial chain, long-term steady growth. The company was founded in 2000, listed on GEM in 2011, and acquired all shares of Tianma Group in 2016, gradually becoming one of the few enterprises in the glass fiber industry with a full industrial chain layout from glass fiber yarn, glass fiber products, chemical products (resins, etc.) to terminal composites. The company's revenue structure is dominated by glass fiber and products, supplemented by chemical products such as resins.

In the glass fiber business, glass fiber yarn and glass fiber products each account for about half of the sales ratio. Among glass fiber products, short-cut felt and thin felt are the main products.

The company has been growing steadily over a long period of time, and the production capacity of glass fiber yarn continues to expand. Currently, the production capacity is about 0.3 million tons, and the scale of glass fiber yarn is at the forefront of the industry.

Profitability continues to catch up and is in the first tier. There is still a gap in the size of the company compared to the top three glass fiber companies, but profitability continues to catch up and is already in the first tier. The company is a private enterprise with flexible management mechanisms and steady operation with low leverage. The overall cost ratio has long been superior to that of its peers, but previously production costs were slightly lower. With the ignition of 0.1 million tons of alkali-free thick yarn in 2021, advanced production lines brought about a reduction in overall costs. Combined, the company adjusted its business strategy flexibly, and the product structure was continuously optimized, and the profitability gap narrowed significantly compared to leading companies.

Glass fiber: significant product & export advantages, more flexible production capacity expansion. Product advantages: long-term accumulation, leading product strength in segmented fields. The company started by producing products, and has significant competitiveness in the fields of non-woven products such as short-cut felt and thin felt (for example, short-cut felt products have a market share of more than 50% in the domestic car roof felt market), and its share of product sales is higher than that of peer companies, so it is relatively less affected by fluctuations in the industry cycle, and the overall operation is more steady.

Export advantage: Deeply involved in overseas markets, European taxes are lower than peers. The company accounts for a relatively high share of overseas revenue, accounting for about 33% of exports in 2023, second only to China Jushi and International Composites. Considering that both China Jushi and International Composites have overseas bases, direct exports account for the highest share in Changhai. Overseas prices declined relatively little during the current cycle. At the same time, the company's anti-dumping duty rate in Europe was far lower than that of its peers. Therefore, when the domestic glass fiber industry weakened sharply, the company's overseas gross margin remained relatively good, and the overall profit level of the glass fiber business was relatively smooth. Against the backdrop of a recovery in overseas demand and relatively strong exports this year, Changhai shares, which account for a high share of exports, have also benefited even more.

Capacity flexibility: Long-term production capacity continues to expand, moving towards one million tons. The company plans to invest in the construction of a 0.6 million ton high-performance glass fiber intelligent manufacturing base project, of which the first line is expected to be put into operation by the middle of this year. Tianma's 0.03 million ton technology was changed to a 0.08 million ton project, which is mainly used in fields such as wind power and new energy vehicles. It will supplement the company's share of high-end products and increase profitability. Cold repair technology reform began at the end of last year, and production is expected within the year. Production capacity is expected to expand from about 0.3 million tons to about 0.5 million tons by the end of this year. In the future, as the next three production lines at the 0.6 million ton base are put into operation, more cost improvements and efficiency gains are expected to be seen, and we are concerned that the company's growth will continue to be realized.

Industry outlook: Recovery at the bottom of the glass fiber cycle, focus on photovoltaic frame emission. Glass fiber inventories have reached an inflection point. After a sharp drop in industry inventories in March-April, inventory was relatively stable in May-June. Looking at the annual level, the supply and demand for glass fiber improved marginally (demand increased by more than 5%, supply increased by 3%), and it is expected that thick yarn will continue to drop and price increase after the peak season in the second half of the year. Elasticity can be seen on the progress of glass fiber photovoltaic frames.

Resin: The industrial chain is collaborative, and profits are relatively stable

The resin business of the subsidiary Tianma Group can collaborate well with the glass fiber business to form an integrated advantage in the industrial chain. First, on the production side, resins and infiltrants produced by Tianma Group are important raw materials, and products such as short-cut felt and wet thin felt produced by the company can be further processed into glass fiber composites in Tianma Group; the second is the client, which is extremely relevant and can be sold collaboratively. The company's resin business mainly earns processing fees, and profits are relatively stable. With the downstream recovery of glass fiber this year, corresponding resins are also expected to gradually pick up.

The company is expected to have net profit of 0.34 or 0.55 billion yuan in 2024-2025, corresponding to PE valuation 11 or 7 times, and is highly recommended.

Risk warning

1. Low expectations for domestic economic recovery; 2. Industry production capacity exceeds expectations; 3. Exchange rate fluctuations are large; 4. Trade frictions escalate; 5. Risk that profit forecasting assumptions are untrue or fall short of expectations.