Key points of investment:

Steady rise in adversity: demand for consumer electronics packaging picked up in 24 years, and the global layout accelerated

As a leader in the domestic packaging industry, the company has developed from the field of advantages of consumer electronics packaging in the early days to a multi-product, multi-customer-driven growth pattern. 24H1 achieved revenue of 7.353 billion yuan, +15.5% year over year, and net profit to mother of 0.497 billion yuan, +15.2% year over year. 1) 3C packaging: Demand for consumer electronics has improved over the past 24 years. According to Wind, 2Q24 global smartphone sales increased 6.5% year-on-year, the highest year-on-year growth rate in three years. With the peak consumer season in the second half of the year and the subsequent wave of AI switching, it is expected to support the company's 3C packaging (accounting for nearly 70% of revenue) business. 2) Tobacco packs & wine packs: As the market-based trend of China Tobacco tenders increased, the number of new cigarette packs won by the company increased since 2022, and successfully introduced high-quality major customers such as Guangxi China Tobacco, Yunnan China Tobacco, Hunan China Tobacco, Fujian China Tobacco, and Anhui China Tobacco. The wine bag business covers the main liquor producing regions, and cooperation with well-known customers is deepening. 3) Environmentally friendly paper and plastic: In line with the double carbon trend, there is broad room for future growth. The company's eco-friendly packaging revenue in '23 was 1.06 billion yuan, and the revenue CAGR for 2019-2023 was 36.1%, successfully introducing a number of major European and American customers. 4) Advancing globalization: The company has established 7 production bases in overseas regions such as Vietnam, India, Indonesia, Thailand, and Malaysia. In 24, it will promote the commissioning of the Surabaya project in Indonesia, the Indonesian Jakarta project, Vietnam's Pyongyang project, and the India Delhi project to further improve the international supply chain; launch new factories in Mexico and the Philippines to explore new packaging categories.

Profit center recovery: controllable raw material costs, improved intelligent manufacturing efficiency, reduced capital expenditure

In 2023, the company achieved gross profit margin of 26.23%, +2.48pct year on year, net profit margin 9.82%, and +1.8pct year over year.

Looking ahead, we believe that three factors are expected to support the continuation of the profit recovery trend: 1) The pressure on raw material costs is manageable. Prices of major raw materials are currently low for nearly three years, and are still declining year on year in 24. 2) Intelligent manufacturing efficiency improvement: Intelligent construction has been accelerated in recent years, and the Xuchang smart factory has achieved remarkable results. Direct labor's share of costs fell from 14% in 2019 to 12.1% in 2023. In the future, as the efficiency of various factories increases, operational efficiency is expected to continue to be optimized. 3) Capital expenditure optimization: As the company's production capacity investment has basically completed a phased layout, capital expenditure has begun to decline in the past two years, and it is expected that the trend of gradual decline in fixed asset investment will not change in the future.

Profit forecasting and investment advice

Raising dividends focuses on shareholder returns. The company plans to have a dividend ratio of no less than 60% from 2023-2025, which highlights the long-term investment value. We expect the company's net profit growth rate in 2024-2026 to be 16%, 18%, and 11%, respectively. The current stock price corresponds to the 24-year PE of 12x, which is lower than the average of comparable companies. As a leading overall packaging solution provider in China, the company is optimistic that the long-term consumer electronics business share will increase steadily. Businesses such as environmentally friendly paper and plastic, wine bags, and cigarette labels will blossom. The second growth curve can be expected to gain momentum, and the profit center is expected to rise steadily, giving it a “buy” rating for the first time.

Risk warning

Demand for terminals falls short of expectations, increased market competition, fluctuating raw material prices, customer concentration risks, etc.