Investment advice
After the company's real estate business is realized, it is expected that fundamentals and valuations will resonate and reverse. The company's historical stock price showed a strong correlation with dye prices, and successful mergers and acquisitions such as taking a stake in KIRI and the acquisition of Desda also catalyzed the company's stock price to a certain extent. After the overall chemical bull market in 2021, Zhejiang Longsheng's stock price experienced a cyclical decline, mainly due to the high-profit dye business ushered in a new round of supply-side growth. Dye prices declined significantly, and the corporate ROE center declined markedly. We believe that the company's ROE is expected to return as losses continue to be cleared in the dye industry and 2025-2026 may usher in a cycle reversal. At the same time, the Huaxing Xincheng project, which has been invested for many years, will enter the capital return period in 2025-2027. The company's net cash level is expected to increase dramatically, and the dye and real estate business is expected to resonate and reverse.
rationales
Disperse dyes without supporting intermediates have actually lost a single ton, and the 2025-2026 industry is expected to usher in a cycle reversal. Zhejiang Longsheng's gross margin level is significantly higher than that of domestic peers due to perfect dye intermediate support and the support of Desida's high-margin dye business overseas. According to Zhuochuang News data, as of May 29, 2024, scattered black 300% was reported as having collected 17,500 yuan/ton. Dye companies that do not support intermediates are actually making marginal profits; some companies may have lost a single ton. We believe that 2024 may be the year when dye prices bottomed out, and competition in the industry may become more intense, but considering that the general cash flow situation of dye companies is relatively good, and that some dye companies have just finished financing, the willingness of companies to voluntarily withdraw from competition may be low. The “reshuffle period” may continue for some time, and the dye industry may experience a cycle reversal in 2025-2026.
Net cash is expected to improve significantly after the funds for the Huaxing Xincheng project are returned. The company began developing the Huaxing Xincheng project in 2015, which took a long time and invested a lot of time. In 2023, the company's total inventory book value reached 29.9 billion yuan, of which 21.8 billion yuan was real estate development costs. According to the announcement of the Housing Security and Housing Administration of Jing'an District of Shanghai, sales of the project began in the first half of 2024. We believe that after the capital for the Huaxing Xincheng project is returned, the company is expected to experience a resonance reversal in fundamentals and valuation. On the one hand, the confirmation of real estate revenue is expected to continue to provide profit flexibility in 2025-2027, and abundant net cash is expected to provide ample room for the company to raise dividends and capital expenditure levels in the future. On the other hand, it is expected that the company's net cash level will be greatly boosted after the real estate development costs in inventory are carried over. Currently, the company's net market ratio is less than 1. The real estate business, which has not returned capital, has withstood a certain valuation discount, and is expected to rise in valuation after switching to net cash.
Profit forecasting and valuation
We believe that after 2025, the dye industry may experience a cycle reversal. Prices of dyes and intermediates are expected to rise, combined with the return of capital for the company's real estate projects, fundamentals and valuations are expected to reverberate. We maintained 2024/2025 net profit of 19.69/2,391 billion yuan. The current stock price corresponds to 2024/2025 14.9/12.3 times the price-earnings ratio. Considering that the company's valuation level is expected to recover after the real estate business is gradually realized, we raised our target price by 20% to 12.84 yuan, corresponding to a price-earnings ratio of 21.2/17.5 times in 2024/2025, maintaining the industry rating. There is 42.4% room for improvement compared to the current stock price.
risks
The return of capital for real estate projects was poor, and dye/intermediate production capacity was greatly expanded