The leading digital inkjet printing company continues to improve the product matrix. Honghua Mathematics has been deeply involved in the field of digital printing for 30 years and has now developed into a comprehensive solution provider integrating digital printing equipment/ink/process solutions. According to statistics from the China Textile Machinery Association, in 2017-2019, the company ranked first in sales of high-end textile digital inkjet printing machines in the domestic market, with a market share of over 50%. The company simultaneously lays out the upstream ink business and the downstream textile automated sewing equipment business, continuously improving the product matrix, and achieving the “ink+equipment+application” industry chain layout.

The penetration rate of digital printing equipment has increased, and “quick return of small orders” has accelerated downstream transformation. In 2015-2021, the penetration rate of digital printing in China increased rapidly from 2.1% to 11.4%, which is the field with the highest growth rate in China's textile printing market. According to the China Printing and Dyeing Industry Association, the penetration rate of digital printing in China will reach 25% in 2025. In the process of transformation and upgrading, China's textile and garment industry has found a “small order and quick return” flexible supply chain model. With the rapid rise of cross-border e-commerce platforms such as SHEIN/TEMU, terminal demand is more personalized/small-batch/fast fashion, forcing the entire textile industry chain to shift to a “small batch, zero inventory, and quick response” production method, which is expected to accelerate the replacement of digital printing processes with traditional printing processes.

Ink is a key consumable for digital printing, and “equipment+ink” two-wheel drive performance is growing. Digital inkjet ink is the main consumable material in the digital printing process, accounting for up to 40% of its production cost. Through the acquisition of Tianjin Jingli's own digital printing ink, the company increased the penetration rate of digital printing through large-scale effects. On the equipment side, the company increased the production line with an annual output of 3,520 sets of industrial digital inkjet printing equipment through a 1 billion fixed increase project; on the ink side, the company's digital inkjet ink project with an annual output of 0.047 million tons is expected to be completed and put into operation in 2025, opening up a second curve of revenue growth for the company. “Equipment+ink” two-wheel drive helps the company open up the entire digital printing industry chain and increase the market share of the company's products.

Investment advice: The company is a leading domestic digital printing equipment company with deep product technical strength. As the processing costs of digital printing continue to approach traditional printing, and the superposition of the downstream “quick return of small orders” flexible supply chain model accelerates downstream transformation, it is expected that the penetration rate of digital printing will continue to increase. The company continues to improve the product matrix and open up the “ink+equipment+application” industry chain layout, and growth is expected to show. We expect that in 2024-2026, the company will achieve operating income of 1.665/2.243/2.927 billion yuan and net profit to mother of 0.416/0.543/0.7 billion yuan, corresponding PE of 24.82/19.01/14.75 times, respectively. This is the first coverage, giving it an “increase in holdings” rating.

Risk warning: Risk of lifting the ban on restricted shares, risk of equity pledge, risk of increased competition in overseas markets, risk of reliance on outsourcing of core raw material nozzles for digital printing equipment, risk of exchange rate fluctuations, etc.