Key points of investment:

Shengxing Co., Ltd.: leading metal packaging enterprise, balanced business layout development

The company's main products include three-piece cans, two-piece cans, aluminum bottles, etc. Major customers include well-known domestic and foreign food, beverage, and beer companies such as Yangyuan Drinks, Tencent Red Bull, Wang Laoji, Tsingtao Brewery, China Resources Snowflake, Pepsi, and Coca Cola. The company's performance has been adjusted due to factors such as overcapacity and increased competition in the industry since 2016. Catalyzed by factors such as the gradual release of Tencel Red Bull products in recent years and the release of production capacity from overseas, the company's net profit improved significantly in 2023, with a year-on-year growth rate of 59%; in the first half of 2024, the company expects to achieve net profit of 0.225 billion yuan to 0.26 billion yuan, an increase of 42.4% to 64.55% over the previous year.

With the optimization of the industry pattern, performance flexibility is expected to be unleashed

Three-piece can: The supply and demand pattern is stable, benefiting from the high growth of major core customers. The size of the three-piece can market in China has remained stable. In 2022, the market size of China's three-piece can industry was about 19.23 billion yuan, an increase of 9.48% over the previous year. In 2022, the production of three-piece cans was about 31.05 billion cans, and the demand was about 30.53 billion cans, up 4.33% and 4.26% year on year, basically balancing supply and demand. By binding Tencel Red Bull, the Red Bull series of beverages became an important business growth point.

The company began supplying three cans for Red Bull Anaji drinks in 2019. Energy drinks have now developed into one of the fastest growing segments in the beverage industry. With the expansion of Red Bull brand energy drink customers, it has now become the core supplier of Tencel Red Bull series products. It is expected that in the future, as the partnership continues to deepen, the three-piece can business pattern with equal emphasis on vegetable protein drinks and energy drinks.

Two-piece cans: Optimistic about the continued integration of the industry, and overseas production capacity will contribute new profit growth points. At present, the competitive landscape of the industry has initially taken shape, and CR4 is over 70%. The company is forward-looking to lay out overseas production capacity and improve the profitability of two-piece tanks: the company will build Cambodian two-piece tank production capacity in 2019, complete the first to third phase of capacity construction in 2023, and is expected to increase the production capacity of 1.4 billion overseas two-piece tanks. The average price of a two-piece can in Southeast Asia is higher than at home, and it became a new profit growth point after production was put into operation. Looking ahead, we believe that if the industry is further concentrated in the future, the strengthening of the industry's pricing power is expected to be reflected relatively quickly, which is expected to drive the optimization of the supply and demand pattern and profit improvement.

Aluminum bottles & filling: 1) Aluminum bottles: The consumer scene is picking up, and key customers continue to break through. The company entered the aluminum bottle business through the acquisition of Bode Technology in 2016. In recent years, the company has continued to introduce advanced international production equipment to expand high-end aluminum bottle production capacity and develop new can types. Currently, the production capacity of aluminum bottles is about 0.24 billion cans. The company's aluminum bottle products are mainly used in the packaging of high-end beer and beverage products. The production capacity, technical level, product competitiveness and customer structure are in a leading position in the industry. 2) Filling: Value-added service support for core customers, production capacity continues to expand. Since 2015, the company has developed the beverage filling OEM business to further enhance customer stickiness. In 2023, while product quality and customer satisfaction continue to improve, the filling business output achieved good growth. Currently, the manual filling production capacity is about 2 billion cans, and the filling production line will be further expanded in the future to strengthen ties with core customers.

Profit forecasting and investment advice

We expect the company's revenue growth in 2024-2026 to be 3%, 7%, and 5%, respectively, and net profit growth rates to mother of 27%, 30%, and 12%, respectively. Currently, the company's stock price corresponds to PE of 11x in 2024, which is lower than the average valuation level of comparable companies of about 16x. Considering the stability of the company's three-piece can business, the two-piece can profit is expected to recover, and for the first time, it has been covered with a “buy” rating.

Risk warning

Industry consolidation fell short of expectations, raw material prices rose sharply, downstream demand fell short of expectations, risk of large customer concentration, etc.