Key points of investment:

Zhongxin Co., Ltd.: leading pulp molding enterprise

The company is a high-tech enterprise specializing in R&D, production and sales of naturally degradable plant fiber molded products. The main products are pulp molded tableware, which accounts for more than 97% of revenue. In 2022, the company's global market share in the field of molded pulp tableware (in terms of output value) was about 16%, and the output accounted for 20% of the country's molded pulp tableware. Overseas demand was booming in the first three quarters of 24, and the company's performance was impressive. 24Q1-3 revenue was 1.148 billion yuan, +19.4% year over year, and net profit to mother was 0.236 billion yuan, +49% year over year.

Global environmental trends support industry demand, and China is the main supplier

1) Demand side: With the advancement of domestic and overseas plastic ban and plastic restriction policies in recent years, industry demand has been boosted.

According to the prospectus of Zhongxin Co., Ltd., the global pulp molded packaging market in 2022 was 5.111 billion US dollars, of which food packaging/tableware accounted for 44.6%/24.2% respectively; the pulp molding industry's CAGR is expected to reach 7.6% from 2023 to 2030. Furthermore, compared with other degradable plastic products, pulp molding has outstanding advantages in terms of environmental protection and cost performance. 2) Supply side: According to the company's prospectus, the total global pulp molding production capacity in 2022 was about 4.42 million tons, of which China's production capacity was 1.79 million tons, accounting for 40.5% of global production capacity, and China's export volume continued to grow in recent years. From January to August 2024, the export volume of pulp molding was 0.1577 million tons, +79.4% over the same period last year. 3) Competitive pattern: China's pulp molding industry is less concentrated, but the catering and precision packaging segments are concentrated. CR5 (yield meter) in 2022 was 50% and 75%, respectively.

The company has an excellent customer structure, stable cost advantage, and capacity construction ensures long-term development

In recent years, the company has led the ROE and gross margin industry, which is about 15-30pct and 20-30pct higher than the average value of peer companies, mainly due to: 1) Excellent customer structure. The company's main customers are leading international packaging suppliers such as Amer CareRoyal, Huhtamaki, Bunzl, Genpak, Eco-Products, etc., and the share of the top five customers dropped from 58.7% in 2019 to 39.3% in 2023. 2) The company's nearby procurement of raw materials and energy use have created cost advantages. The main raw materials, bagasse pulp and bamboo pulp, are stable in China. The company's main production base, Guangxi, is a major sugar cane producing province, and the main energy consumption for production is electricity, biomass pellets, bark, etc. 3) The company currently leads the industry with a total production capacity of 0.1237 million tons. The scale advantage is obvious, and overseas production capacity is being invested at an accelerated pace. The fund-raising project plans to expand production in Chongzhou, Guangxi (phase I 0.06 million tons) and Laibin (phase I 0.03 million tons) to further enhance competitiveness. Recently, the United States officially launched a double anti-investigation into pulp molding originating in China and Vietnam. Currently, the investigation is still in the investigation stage, and it is expected to continue for about 12 months. After filing the case, the company accelerated the construction of the Thai factory and strived to start production 25Q1 to accept orders from American customers.

Profit forecasting and investment advice

Without considering the impact of major changes in trade policy, we expect the company's revenue growth rates to be 30%, 24%, and 20% respectively in 2024-2026, and 46%, 19%, and 17%, respectively. Using the comparable company valuation method, the average PE of comparable companies in 2024 was 20 times higher. Pulp molding benefits from environmental protection trends and has broad room for growth. As an industry leader and leading industry in scale and profitability, the company covered the “holding” rating for the first time.

Risk warning

Increased industry competition, changes in trade policies and tariffs, fluctuations in raw material prices, risk of customer concentration, etc.