Company: A leading tannery leader with diversified growth, a leader in tannery with diversified growth. High goals and incentives show confidence. At the beginning of its establishment, the company focused on the development, production and sales of high-end domestic cow top leather. Since 2018, it has increased its export sales expansion. Core customers include Lirong, Senda, Red Dragonfly, TIMBERLAND, VF, etc., which have the largest market share in the domestic cow top leather market. Along with the steady development of the first layer of leather on the upper surface, the company began to acquire automotive leather and two-layer leather that collaborated on raw materials and manufactured products with similar but more prosperous products. Among them, 60% of the holding company Hongxing have supplied various models such as Ideal, NIO, and Wanjie. 51% of the holding company Baotai is engaged in deep processing of two-layer leather. Currently, upper leather/car leather/two-layer leather account for 69%/22%/5%. In 2023, a broad-coverage, high-target equity incentive plan was released. That is, the bottom line target of 80% exercise ratio is a net profit growth rate of no less than 30%/20%/20% in 2023-2025, showing confidence.

Main business: Domestic sales lay the foundation, export sales set sail

Industry: Demand stocks are scattered and supply is slowly optimized. The domestic traditional adult footwear industry is weak. The economy weakened markedly in 2014-2021 due to sports diversion and industry withdrawal. During this period, the CAGR was -0.8%, and the share fell from 72% in 2013 to 44% in 2023. However, looking at the segmentation structure, on the one hand, women's shoes can still maintain low to medium order growth in the future, which is clearly superior to men's shoes. On the other hand, the growth rate of products positioned at the mid-range and above is ahead of low-end mass products. On the supply side, industry stock and supply have been slightly optimized, and potential incremental supply is expected to be limited due to weak downstream conditions, limited investment scale, and increased difficulty in obtaining environmental indicators.

Company: Reform secures profits and diversification promotes growth. After the company went public, it fell into a profit slump due to weakening industry demand and being dragged down by downstream brands. Later, active reforms focused on profit. Looking ahead, on the revenue side, the main business capital barriers+procurement advantage+delivery leading+environmental protection qualifications jointly strengthen competitiveness. Domestic sales are positioned as a relatively booming segment. Domestic upper leather sales are expected to grow steadily under slow supply optimization. Export sales are mainly aimed at global sports brands with high prosperity and excellent layout. With Indonesian factory investment and increased localized procurement, the company is expected to open up the situation and become the main driver for the company's future shoe leather growth. On the profit side, along with countercyclical inventory adjustment+optimized product structure+reduction in exchange exposure, the company's profit stability is strengthened, and profit flexibility can be expected at the bottom of raw materials.

Hongxing: Take advantage of the momentum to rise, gather momentum and become strong

The industry is in a period of expansion and pattern optimization, and has flourished. Based on the platform and industrial advantages, the company acquired Hongxing into NEV interiors in 2022, and Hongxing's revenue/net profit CAGR reached 118%/261% in 2021-2023. The automotive leather interior market is expected to be within 10 billion dollars, but the market is still expanding as the share of high-end and new energy car companies increases. In terms of pattern, product barriers, and cooperation models, the automotive interior supply barriers are high and the pattern is excellent. There are 1 to 2 interior suppliers for one model, and both upstream and downstream of the industry are highly concentrated. In recent years, domestic interior manufacturers represented by Hongxing have taken advantage of new forces to rise. Looking ahead, Hongxing's deep cooperation is ideal as a leader in new forces. Sales of models equipped with NIO and Wenjie are expected to bottom up, revenue growth is highly certain, and new customer expansion progresses in an orderly manner with the endorsement of leading new forces. Looking ahead, the advantages of synergy and scale led Hongxing's profit margin to rise rapidly, and the slope is expected to slow down in the future. In the mid-range phase, it is expected that mid-range and high-end new energy models will still account for the main share of Hongxing's supply, so model-led profit margins are relatively stable, and subsequent large-scale model development will affect the long-term profit margin center.

Baotai: Exploring potential industries, poised for far-reaching momentum

The acquisition of Baotai dug deep into the value of two-layer leather, and the downstream boom is high. Baotai products include raw materials for two-layer leather and two-layer collagen products, accounting for 73%/27%. Two-layer cowhide is widely used in sneakers. The CAGR for the domestic sneaker industry was 8% in 2018-2025, and the collagen market is expected to maintain high order growth in the future. It is expected to gradually contribute to a considerable increase in profits after business consolidation is smooth.

Profit forecasting and valuation

The main business is expanding export sales into the sports industry chain. It has now entered the supply chain for global sports brands such as VF and Adidas, and is expected to open up room for growth and valuation in the long term. The new businesses, Hongxing and Baotai, are based on platform advantages. The industry is booming and is in a stage of high growth, which can be expected to drive the company's growth. The company's net profit for 2024-2026 is estimated to be 0.23, 0.29, and 0.33 billion yuan, +25%, +23%, and +16% over the same period, corresponding to PE of 11, 9, and 8X. It is an underestimated scarce target with both growth and high dividends in the industry, and is covered for the first time to give it a “buy” rating.

Risk warning

1. Downstream demand recovery falls short of expectations; 2. Raw material prices fluctuate; 3. Lianhua leather production capacity investment and order conversion progress falls short of expectations; 4. The competitive pattern of new energy interior has intensified; 5. Profit forecast assumptions are unfounded or fall short of expectations.