First, IXPE foam production leading enterprises, rapid growth
The company focuses on the research and development, production and sales of electron irradiated crosslinked polyethylene (IXPE) products. With its strong R & D strength and excellent product quality, it has become one of the leading IXPE manufacturers in the industry. IXPE foam is widely used in many fields because of its excellent environmental protection and physical and chemical properties. More than 99% of the company's IXPE products are used in the field of PVC plastic flooring in home decoration in a green and healthy life, and the company's products have entered the supply system of the world's top 500 enterprises Home Depot through downstream customers. The company's production capacity has increased from 22.1328 million square meters in 2017 to 74.1472 million square meters in 2019, and is expected to reach 300 million square meters in 2023 with the release of fund-raising projects and new production capacity in overseas Vietnam. From 2016 to 2019, the company's operating income rose from 57.277 million yuan to 364.968 million yuan (CAGR=85.4%), and its net profit increased from 10.185 million yuan to 115.833 million yuan (CAGR=124.9%). It mainly benefited from the rapid growth of downstream customer demand, and the revenue of popular series and antibacterial enhancement series IXPE products, which should be used in the field of home architectural decoration, accounted for relatively high revenue. The company pays attention to independent innovation and product technology research and development, currently has 83 patented technologies, leading peers.
Second, accelerate the replacement of similar products, and the output and sales volume will continue to increase.
The foam industry where IXPE products are located is developing rapidly, and compared with other kinds of foam, the comprehensive performance of IXPE is better. Coupled with the support of national policies, IXPE enterprises develop rapidly and have great potential for development in the future. The other two leading IXPE production companies in China are Xiangyuan Xincai and Zhejiang Xinglian, each with their own emphasis on product application areas and giving play to their competitive advantages in their respective directions. Overall, Runyang Technology has higher output, higher capacity utilization and stronger profitability (2019 ROA, Runyang Technology 28.25%, Xiangyuan Xincai 19.05%, Zhejiang Crosslinking 14.59%). The company's output rose to 81.5386 million square meters in 2019, and the production and marketing rate of antibacterial enhancement series and popular series products exceeded 100% in 2019. The scale effect gradually appeared, superimposed with the decline of raw material prices. The average unit cost of the company's IXPE products decreased from 2.92 yuan per square meter in 2017 to 2.18 yuan per square meter in June 2020, and the gross profit margin increased steadily. Offset the reduction in product prices caused by the increase in tariffs in the trade war between China and the United States in 19 years.
Third, IXPE subdivision industry is small and beautiful, downstream demand is booming, the company's products are in short supply in Europe and the United States and other developed countries, the demand for PVC plastic floor is larger, the "toxic floor" incident in 2015 made American consumers pay more attention to the environmental performance of the floor, and the PVC plastic floor market in North America maintained sustained and steady growth on the basis of a large base. From 2011 to 2019, US imports of PVC plastic flooring increased from US $687 million to US $3.345 billion, with an average annual compound growth rate of 21.89%. European PVC plastic floor imports increased from 282 million euros in 2011 to 772 million euros in 2019, with an average annual compound growth rate of 15.46%, mainly from China. Moreover, the proportion of PVC plastic flooring in imported floor decoration materials in European and American markets has increased, gradually replacing traditional floor decoration materials such as carpets and wood flooring. In 2019, China's PVC floor export reached 33.4 billion yuan, and in 2017-2019, CAGR reached 20.6%. The demand growth of IXPE floor directly drove the demand of IXPE products in our country. As a large-scale PVC production enterprise, the company's production capacity continues to expand, but it is still in short supply. Moreover, domestic consumer demand is still being cultivated and there is a lot of room for growth. To sum up, the IXPE subdivision industry is small and beautiful, the demand is growing rapidly, and the competition pattern is good.
4. New products enter the mother and child industry, high gross margin helps enterprises develop with the improvement of income level and the enhancement of parenting concepts, parents' ability and willingness to pay for infant-related products continue to increase. There are about 15 million newborns in China every year. China's maternal and child market is expected to reach 3 trillion yuan in 2020, and the annual cumulative consumption of durable goods for a newborn can reach 4000 yuan. In China, the higher-end and safer XPE baby activity climbing pads are mostly imported from abroad, and the main imported brands are from South Korea. In 2019, the import value of XPE climbing pads from South Korea reached 35.1 million yuan.
The company can cooperate with well-known baby products brands to develop and produce IXPE baby activity protection pads, which will have a broad market space and higher gross profit margin in the future, forming a new profit growth point.
Fifth, profit forecast and rating
We estimate that the company's net profit from 2020 to 2022 will be 134 million yuan, 202 million yuan and 283 million yuan respectively, with a CAGR of 45%, a corresponding EPS of 1.34 yuan, 2.02 yuan and 2.83 yuan, and a PE of 31.08X, 20.60X and 14.69X, respectively. Considering that the company is deeply engaged in IXPE sub-industries, with scale and technical advantages, and its future performance is expected to grow at a high rate (more than 30%), it will be given a 30-fold PE in 2021, corresponding to the target price of 60.60 yuan, covering for the first time and giving a "buy" rating.
Risk tips: increased competition, lower-than-expected demand, fluctuations in raw material prices, production expansion progress and profits below expectations
