Veteran metal packaging leader, the proportion of two-piece can business continues to improve. Cofco Packaging is an important part of the business sector of Cofco Group, which has been ploughing the packaging industry for 30 years, covering tinplate packaging, aluminum packaging and plastic packaging. The company's comprehensive strength is strong, tinplate business in steel buckets, milk powder cans, spray cans, unscrew lids and other sub-track markets are ranked first, aluminum two-piece cans business capacity ranks among the top three in the industry. The company has focused on the two-piece can business in recent years. In 2019, the revenue from the two-piece can reached 3.1 billion yuan, accounting for 45% of the total revenue.

The relationship between supply and demand of two-piece cans has been continuously optimized, and the industry has returned to the upward cycle of prosperity. The two-piece can industry has experienced capacity adjustment in recent years, small and medium-sized capacity losses have withdrawn, leading enterprises have merged and integrated, production capacity has expanded in an orderly manner, and the competition pattern has been continuously optimized. At present, the share of Oruijin, Baosteel Packaging, Cofco Packaging, and Xingxing Control has reached 20%, 18%, 17%, 12%, and 65%, respectively. At the same time, the steady growth of downstream demand driven by the increase in canning rate has led to the recovery of capacity utilization from 68% in 2016 to 81% in 2019, and the relationship between supply and demand has been continuously optimized. As the leader's demand for profit improvement is highly consistent, with the enhancement of bargaining power in the future, the price of the two cans is expected to continue to rise; at the same time, the high-end downstream product structure will also give priority to companies with strong technical strength and increase their gross profit margin. The industry returns to the upstream cycle of prosperity, and the leader will always be strong.

High-quality customers build a strong moat, leading the profitability industry. The packaging industry is deeply bound with the downstream, and generally expands the scale of income by growing together with high-growth customers and increasing the supply ratio, so high-quality customer resources are the core competitiveness. Relying on Cofco Group, the company has accumulated a large number of leading consumer goods customers such as Budweiser, China Resources Beer, Coca-Cola Company, Jiadobao and so on. At the same time, the company has a strong ability to expand new customers, and the revenue of the top five customers accounts for only 41%, which is lower than the industry average, effectively reducing the dependence of a single customer. The company's two-piece tank production can achieve national layout, with strong scale advantages, and with strong technical and management capabilities, the gross profit margin continues to be higher than that of the same industry; tinplate business covers all subdivision tracks and has a high degree of freedom to adjust with the needs of the industry. spread the risk of income fluctuations in a single business.

The gross profit margin of the two-piece can business has both increased, which is expected to continue to contribute to profit elasticity. The company's two-piece can business, on the one hand, relies on the "single factory and two lines" model to expand production efficiently at advantageous sites, on the other hand, it has built new production capacity in new markets such as Kunming and Belgium, and its income is expected to continue to grow in the future. The profit improvement logic of superimposed two cans continues to cash in and the customized demand drives the gross profit margin to rise, and the company's profits are expected to be released faster. Tinplate business focuses on the growth potential of milk powder cans, steel buckets, spray cans and other businesses, hedging three cans revenue decline. In addition, the proper settlement of the Jiadobao dispute will bring more than 1.7 billion cash to the company, and abundant cash flow will reduce the company's financial expense rate and provide strong support for future business development.

Investment suggestion: we predict that the operating income of the company from 2020 to 2022 will be 7.98 billion yuan, an increase of 2.7%, 8.7%, 10.4%, 3.3, 3.9 / 460 million, and 8.7%, 18.4%, 17.7% respectively. Taking into account the company's leading position in the industry and the growth potential of future revenue performance, combined with the industry average valuation of A-share companies, we give the company a target price of HK $6.22, a "buy" rating of 15 times PE in 2021.

Risk hints: beer canning rate is less than expected risk, customer demand growth is less than expected risk, raw material price fluctuation risk