Incident: Honghua Mathematics signed a tripartite strategic agreement with Interstate Digital and Dongshen Industrial to promote the digital and intelligent development of the home textile industry. On October 8, Honghua Digital, Interstate Digital, and Dongshin Industries signed a strategic cooperation agreement. According to the agreement, the three parties will focus on innovative applications of digital printing technology, Honghua Digital's latest generation Singlepass technology, and digital intelligence upgrading in the home textile industry to strengthen cooperation and collaborative development, give full play to their respective advantages in resources, technology, and innovation, and further enhance the role of digital printing in the transformation and upgrading of the home textile industry.

Singlepass in the home textile industry is accelerating penetration, boosting the digital transformation trend. With the surge in demand for personalized and customized products in the consumer market, traditional production models are no longer able to meet the new needs of the market. Through innovation in digital printing technology, the home textile industry will be able to achieve flexibility and quick reversal, reduce inventory, enhance market competitiveness, and at the same time satisfy consumers' pursuit of high-quality and personalized products. Interstate Digital plans to build an intelligent digital printing factory with a daily output of 2 million meters within the next two years through continuous technological innovation and capacity expansion; it is expected to expand the Singlepass production line from the current one to ten units within two years. Previously, on September 20, Honghua Digital launched the world's first wide-format paint Single Pass in Jiangsu. Interstate Digital has always been committed to promoting the digital and intelligent development of the home textile industry. The Honghua VEGA One Single Pass digital printing machine introduced this time has not only filled the gap of Single Pass digital printing machines using direct paint injection processes on global wide format textiles, but will also lead the global digital printing technology to a higher level.

The entire industrial chain layout of Honghua Mathematics obtains advantages such as cost, and expands multiple fields to open up room for growth. 1) Vertical:

The layout obtains upstream cost advantages and opens up the downstream textile flexible chain. From an upstream perspective, on the ink side, the company lays out ink and raw materials to form a complete production process for inks such as dyes and paints to reduce manufacturing costs; on the sprinkler side, the company cooperates deeply with Kyocera Japan to form large-scale procurement capabilities. In terms of downstream expansion, the company expanded sewing and other links downward, acquired TEXPA GmbH, a German automated textile sewing equipment company, and opened up a flexible textile supply chain. 2) Horizontal: Underlying technology is common, expanding the non-woven field and opening up room for growth. The core technology of digital printing is highly scalable. The company makes full use of the core inkjet printing technology, scale advantages and ink development and production advantages accumulated in the field of textile printing to continuously reuse industrial digital printing technology in other technical fields such as book packaging, printing and display, decorative building materials, electronic printing, 3D printing, corrugated paper printing, label printing, etc.

Profit forecasting and valuation.

1) Profit forecasting. We expect the company to achieve operating income of 1.639/2.066/2.53 billion yuan in 2024/2025/2026, up 30.3%/26.0%/22.5% year on year; net profit to mother will be 0.424/0.529/0.656 billion yuan, up 30.4%/24.8%/23.9% year on year.

2) Valuation. The company's industry is in the field of digital printing. It is the only digital printing equipment company among listed companies, and covers a complete industrial chain, involving equipment, consumables (ink), and textile (application).

Most of the other companies with similar downstream and industrial chains to the company are not listed or have consistent expectations. Considering the above situation, we selected Jack Co., Ltd. (industrial sewing machinery), Nastar (application of laser and inkjet printing consumables), and Shenzhou International (vertically integrated knitting manufacturer) as comparable companies. Considering that the company's industry is in a relatively early stage, the performance is growing rapidly and future development is more sustainable, and it is suitable for the PEG valuation method. Referring to the valuation of comparable companies, we gave the company a rating of “superior to market” with PEG 1.20-1.25 times in 2024, corresponding PE of 35.64-37.13 times (comparable company's 2024 PE valuation is 16.73-32.05 times), a reasonable value range of 84.11-87.62 yuan/share (the company's EPS is expected to be 2.36 yuan in 2024), and a reasonable market value range of 15.1-15.7 billion yuan.

Risk warning: The company's overseas market expansion falls short of expectations, the risk of core raw material nozzles mainly relying on outsourcing, raising capital to expand production capacity falling short of expectations, increasing the penetration rate of digital printing technology falling short of expectations, and the risk of fluctuations in downstream demand.