Consolidate the position of the main business, and take the lead in cutting into the new biodegradable plastic track. The company is a leading manufacturer of PVC auxiliaries in China, with a total production capacity of 140000 tons of PVC auxiliaries (ACR, MBS, MC), mainly used in pipe profiles, PVC flooring, transparent products and other fields. Benefiting from the decline in raw material prices and the growth of sales of PVC flooring in Europe and the United States, the profitability of the company's PVC auxiliaries business has improved steadily, and the company's PVC auxiliaries business volume is expected to grow steadily in the future. In addition, degradable plastics is the key development area of the company. In March 2020, the company issued a preliminary plan to raise no more than 340 million yuan to invest in the annual production of 60,000 tons of biodegradable polymer material PBAT project, and strive to become one of the first manufacturers in the current tight supply and demand environment.

The ban on plastics opens the market of hundreds of billions of degradable plastics, and PBAT is expected to bring greater flexibility. Due to the strict legislative environment, Europe and North America used to be the largest demand market for biodegradable plastics in the world. On January 19, 2020, the Ministry of Environment issued opinions on further strengthening the treatment of plastic pollution. So far, 31 provinces and municipalities have issued plastic bans. On the demand side, the total consumption of express packaging, shopping bags and disposable tableware boxes in the three major areas of disposable plastic consumption regulated by the policy is about 6.844 million tons in 2019. According to the specific requirements and timetable of the provincial government documents for the reduction or prohibition of disposable plastic consumption, as well as the expected share of other alternatives such as paper products and cloth products, we estimate that the theoretical demand for degradable plastics in China will reach 3.7056 million tons in 2025. On the supply side, by the end of 2020, China's PLA and PBAT production capacity were 158000 tons and 265000 tons respectively. In the past, supply was mainly to meet export demand. As the domestic demand market begins to open in an all-round way, the contradiction between supply and demand in the degradable plastics industry has intensified. According to the Daily Economic News, the price of PBAT has risen from 23,000 yuan / ton in early December 2020 to 26,000 yuan / ton in early January 2021, and the profit margin continues to increase. As one of the first manufacturers to land PBAT production capacity this year, the company's biodegradable plastics project is expected to bring considerable performance flexibility.

The former main PVC auxiliaries are expected to grow steadily. China is the largest producer and consumer of PVC auxiliaries in the world, of which the consumption of impact modifiers and processing aids in the first three quarters of 2019 is about 400000 tons. The company currently has a production capacity of 120000 tons of PVC processing aids and impact modifiers, and is continuing to expand production and tamp the leading position. The follow-up benefits from: 1) impact modifier ACR+MBS formulation system continues to replace the currently dominant CPE;2) environmentally friendly, advanced acid process continues to replace the aqueous phase process in CPE; 3) the increase in downstream concentration leads to the improvement of PVC auxiliaries industry concentration and other factors, the company's PVC auxiliaries business profit volume is expected to increase steadily.

Profit forecasts and valuation recommendations. We estimate that the operating income of the company from 2020 to 2022 is 13.47 million yuan, respectively, and the net profit of returning to the mother is 2.49 yuan / 397 million yuan, respectively, and the corresponding PE is 8.8 times that of 14.0 yuan. The company is the leading manufacturer of PVC auxiliaries in China, and the production capacity of degradable plastic PBAT is expected to bring greater performance flexibility. Cover for the first time, giving a "buy" rating.

Risk hint: the price of paper products is downward, and the policy implementation is not as strong as expected.