Huafeng Group's new materials enterprises continue to grow. Huafeng superfiber is a new polyurethane material-ultra-fiber leather manufacturer of Huafeng Group, with a solid position in the industry, a significant competitive advantage and a leading industry in profitability. Since listing, relying on the rapid development of the ultra-fiber leather industry and the competitive advantage of the leading industry, the company has continued to grow, with a compound revenue growth rate of 18.5% from 2011 to 2019. Affected by the epidemic, the company achieved operating income of 2.091 billion yuan in the first three quarters of 2020, down 9% from the same period last year, and achieved a net profit of 158 million yuan, an increase of 53% over the same period last year.

Super fiber leather is a new material track with high prosperity, and it has a broad development prospect. Ultra-fine fiber PU synthetic leather is a new material made by impregnating modified polyurethane resin with ultra-fine fiber non-woven fabric on the basis of full analysis of the microstructure of natural leather. The structure of sea-island ultra-fine fiber is very similar to that of ultra-fine collagen fiber of natural leather, which makes its texture and air permeability similar to real leather. Moreover, because the reticulated AC structure formed by polyurethane is wear-resistant, the polyurethane coating can restrict the slip of the fiber to a certain extent, and the "glued" structure is not sensitive to pinholes. Therefore, the wear resistance and mechanical properties of superfiber leather are significantly better than real leather and other man-made leather, and the substitution potential is huge. At present, ultra-fiber leather has been widely used in shoes, automobile interior decoration, home, clothing and other fields, and the demand continues to grow high. In the future, with the progress of superfiber technology and the reduction of cost, its application field will continue to expand (for example, the market for automobile leather interior has been opened), and continue to replace leather, cloth and other artificial leather.

The company has a significant competitive advantage, and the launch of new capacity will further consolidate its leading position. At present, the company has a design capacity of 102.08 million meters, accounting for about 50% of the country's total production capacity. In addition, the company has a vertical + horizontal integrated industrial chain from resin and superfiber base cloth to veneer leather and suede leather. The advantages of scale and integration make the company's profitability and growth always lead the industry, constantly open the gap with domestic competitors, and gradually catch up with and surpass the global leaders such as Toray and Cola. In the future, the company will open up further growth space from two aspects: 1) to build water-based superfiber production capacity and fixed-island superfiber production capacity using water-based resin and environmental protection veneer technology, expand the high value-added product system; 2) actively extend to high value-added application fields such as automotive suede leather interior decoration to replace Japanese products. With the company's new production capacity of 50 million meters reaching production in 2021, the company's scale advantage and bargaining power between upstream and downstream will be further enhanced.

Profit forecast and investment advice. We estimate that the operating income of the company from 2020 to 2022 will be 475555.369 billion yuan, respectively, and the estimated net profit will be-3.70 PE, equivalent to-0.21 PE, equivalent to-0.32 PE. The company is China's new material subdivision track-the leader of the ultra-fiber leather industry, with significant advantages in scale and integration. In view of the company's extension to high-end products and high-end applications, its profitability and growth will be improved, giving it a "buy" rating.

Risk tips: environmental protection and safety production risk, price fluctuation of superfiber raw materials, weak demand side of superfiber downstream.