Tongfeng Electronics: An established manufacturer of thin film capacitors. Tongfeng Electronics is a company engaged in R&D, production and sales of film capacitors and film materials. It has advantages in technology, R&D, integrated industrial chain, brand, etc., and its products are widely used in home appliances, communications, power grids, rail transit, industrial control and new energy industries. In 2023, the company achieved operating income of 1.083 billion yuan (YoY +4.11%), net profit of 0.087 billion yuan (YoY +17.30%); with 2024H1, the company achieved operating income of 0.639 billion yuan (YoY +19.02%) and net profit to mother 0.047 billion yuan (YoY +8.92%).

The company has the advantage of an integrated industrial chain and is one of the few companies that have both thin film and capacitor products. The company has an industry-specific integrated upstream and downstream industrial chain for polypropylene photofilm-metallized film-film capacitors. It has achieved specialized and large-scale production, which can better guarantee product quality and effectively utilize economies of scale.

The equity incentive plan was implemented for the first time. In December 2023, the company awarded 8.953 million restricted shares to 192 incentive recipients. The initial grant amount was 8.953 million shares, and the grant price was 3.91 yuan/share. The performance assessment targets for lifting sales restrictions in 2024-2026 are: (1) earnings per share for the year should not be less than 0.13, 0.15, and 0.17 yuan/share; (2) the net profit growth rate for the year should not be less than 15%, 25%, and 55% (based on 2022); and (3) the annual cost of the year did not account for more than 93%/92.5%/92% of revenue. The equity incentive target shows the company's management's confidence in the company's performance and cost control.

The market prospects for ultra-thin film materials for new energy are broad, and the company is raising funds to expand the production of film materials projects. Judging from the industrial chain pattern, although China is the world's largest producer of film capacitors, the supporting capacity in the middle and high-end fields is weak. The high-end sector of the global thin-film capacitor industry chain is basically monopolized by foreign companies. In particular, the production capacity of ultra-thin polypropylene film, the core raw material, is seriously insufficient, and it has been dependent on imports for a long time. In August 2023, the company raised 0.4 billion yuan in capital for ultra-thin film material projects for new energy use and supplementary working capital. The issue price was 6.98 yuan/share, which was subscribed by 7 issuers including Dajiang Investment, the controlling shareholder of the company. The company has an integrated upstream and downstream industrial chain of polypropylene photofilm, metallized film, and film capacitors for capacitors. As of 2023, the company has 7 polypropylene film material production lines (excluding 1 production line under construction), 2 polyester film material production lines, and multiple metallized coating and film capacitor production equipment.

Profit forecast, valuation and rating: Due to the easing of the shortage of film materials, gross margin has declined. We lowered our 2024-2025 net profit forecast to be 0.102/0.14 billion yuan (adjusted by -39.6%, -31.0%), and added the 2026 forecast to 0.178 billion yuan, corresponding PE is 31x, 23x, and 18x, respectively. The company is a leading domestic manufacturer of film capacitors and polypropylene film materials. The film materials fund-raising project is progressing smoothly, which is expected to drive high growth in the materials and capacitors business and maintain an “gain” rating.

Risk warning: Industry competition further exacerbates risks, downstream demand falls short of expectations, risk of price fluctuations in raw polypropylene pellets, and new project construction risks.