Rating: OUTPERFORM
We anticipate the emergence of internationally competitive platform-based functional materials companies in China over the next 5-10 years, especially those with globally savvy entrepreneurs, managements and corporate cultures. We favor broad-spectrum capabilities in technological innovation, high value-added products and application development (see below for a shortlist of interesting stocks).
Enormous potential of China’s materials industry vs >USD10bn global giants
In mature economies, materials are a key industry for high-end manufacturing. More than 30 international new materials global giants have a market cap of more than USD10bn. They include: 3M, Honeywell and GE in the US; Europe’s BASF and Linde; Japan’s Shin-Etsu and DNP; and South Korea’s LGC and SDI. In comparison, China’s materials companies are small with more or less singular product lines and downstream markets, and in view of a general restructure of manufacturing cycles and upgrades, the industry continues to expand. We anticipate an industry transformation toward platformization and internationalization over the next 10 years.
3M model: rich and diverse downstream products, sound financials, profitability
American giant 3M has a history of more than 120 years, over 60,000 product lines that cover downstream markets such as consumer, medical and electronics. 2020 revenue/ net profit were USD32.18bn/5.38bn and gross margin/ROE were 48.41%/46.96%. Per capita revenue/gross profit/net profit were about USD338,800/164,000/56,700. 3M’s current market cap is about USD120bn and it is one of the world’s largest wide-ranging functional materials companies. Compared with its global peers, 3M has an edge in business continuity, financial stability and profitability.
3M growth phases: transformation, platform-based internationalization, re-growth
1902-1945 transformation: from corundum mining, 3M transformed itself during World War I and developed new products such as adhesive tape; during the Great Depression, it established technological systems with precision grinding and glueing at the core.
1946-2000 platformization and internationalization: after its IPO in 1946, 3M created a modular technology platform, developing products with multiple applications and achieving a wide diversity. With the help of the US economic boom after World War II, it kept on exploring international markets such as Europe and China.
Since-2000 re-growth: penetrating health services in the 21st century, management upgrades and further growth. Since 2000, its medical business has grown exponentially, with active M&A. It is strategically building out its medical care, and safety and protection businesses, and has introduced the Six Sigma management innovation protocol to guide further growth.
R&D-driven core competitiveness; creative modular technology platform
3M’s core competency lies in the buildup of a modular integrated-technology platform. For instance, 1) the number of technology modules have expanded from 3 to 51 as of 2021. 2) Its single technology platform has high derivation ability and the precision coating process alone has spawned tens of thousands of high-value products. 3) The integration and innovation of different tech modules have driven highly competitive products; the myriad examples include abrasive + adhesive = waterproof sandpaper, base material + adhesive = tape, melt blown cotton + electrostatic electret = N95 mask.
Innovation-driven company culture, employee motivation, organizational ability
3M continues to launch new high-value-added products, helped by another core competitive strength: institutionalized management capabilities.
1) Innovation-driven corporate culture: In its first 50 years, 3M’s Core leader William Mack Knight McKnight put forward its 「15%」 and 「listen to customers」 principles. Today, it adheres to concepts such as 「the voice of the people」 and has established an innovation-driven corporate culture.
2) Emphasis on employee incentives: 3M has continuously introduced employee equity incentives and a dual-tier career development route to ensure the stability of its core talents.
3) Efficient organizational ability: The company established the 3M version of Nobel Prize, the Carlton Prize, and other institutionalized reward funds to encourage innovation and cooperation. It set up the Guinness Special Fund, Origin Fund and other innovation support projects to realize the transformation from conception and R&D to marketization, so as to drive the entire process in scale expansion to achieve the efficient organization of the two core elements of technology and talent.
Investment summary
In view of current economic trends in China such as manufacturing upgrades and internal economic cycle, we are optimistic about the emergence of internationally competitive platform-based functional materials companies over the next 5-10 years, especially capable entrepreneurs, managements and corporate cultures that are globally savvy. We favor broad-spectrum capabilities in technological innovation, high value-added products and application development.
We are optimistic about:
1) Ningbo Exciton Technology (300566 CH, BUY): coating and other technology platforms, FPD/ photovoltaic / automotive has long-term growth potential;
2) Zhejiang Jiemei Electronic and Technology (002859 CH, BUY): integration strategies, passive components + semiconductor multi-product line continues to grow;
3) Shandong Sinocera Functional Material (300285 CH, BUY; initiation) (joint coverage by electronics, chemicals): sustainable precision ceramic materials platform for enterprise growth;
4) Suzhou Shihua New Material Technology (688093 CH, BUY): functional materials system facilitates sustainable development;
5) Jiangsu Yoke Technology (002409 CH, BUY): Precursor, photoresist to build a semiconductor material platform.
We would monitor these stocks:
1) Ningbo Solartron Technology (688299 CH, BUY) (chemicals): a leading reflective film company; we expect high-end base film build-up;
2) Hangzhou First Applied Material (603806 CH, BUY) (new electric energy): Leading photovoltaic film, expanding electronic materials + functional film;
3) Sichuan EM Technology (601208 CH, BUY; initiation) (chemicals): advantages of insulating materials, optical film + electronic materials start new growth.
4) Jiangsu Boqian New Materials Stock (605376 CH, BUY; initiation) (non-ferrous): precision metal powder platform, MLCC, new energy growth potential.
5) Wuxi Acryl Technology (not-rated): business optimization continues; new materials such as optics could replace importation.
Risks include: technology development less than expected: there is uncertainty in the development of key technologies; competition intensifies: double competition at home and abroad may lead to intensified competition; production capacity release less than expected; environmental differences make 3M experience inapplicable.
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