CHANGHAI COMPOSITE MATERIALS(300196)：FOCUSING ON FIBERGLASS AND RELATED PRODUCTS; A NEW ROUND OF PRO

　　Investment positives

    　　We initiate coverage on Changhai Composite Materials (Changhai) with an OUTPERFORM rating and a target price of Rmb14.60 (based on relative valuation approach), implying 19x 2024e and 13x 2025e P/E.

    　　Why an OUTPERFORM rating?

    　　Fiberglass makers have relied on price hikes for destocking since March; earnings to recover as the industry shows clear signs of bottoming out. In late March, and between mid-late April and early May, major fiberglass producers raised prices of mainstream products twice. In early May, some of them raised quoted prices of direct yarn 2,400tex by at least Rmb700/t (tax included) compared with end-March. Industry inventory fell to 600kt at end-April. The efforts to reduce inventory through prices hikes have temporarily paid off.

    　　We estimate that net added output of roving may reach 500kt in 2024, with supply and demand relatively balanced. We believe this may help industry prices return to normal. In our view, industry leaders could maintain excess earnings of Rmb500-1,000/t relative to tier-2 and tier-3 firms.

    　　Products competitive; tax rates in core overseas markets favorable. In our view, earnings of fiberglass-made products are less volatile and their turnover is faster than roving products. The firm's core products made of fiberglass include chopped strand mats (CSM) and wet-laid thin mats. Its lightweight CSM is mainly used in automotive roofs. Changhai was recognized by the Ministry of Industry and Information Technology (MIIT) as a champion, in terms of its technology for high-quality CSM made of fiberglass.

    　　Changhai announced that overseas revenue accounted for 20-30% of its　total revenue. Some of its products exported to the EU were subject to anti-dumping and countervailing duty rates of 4.9% (vs. over 20% for peers). The firm demonstrated its earnings advantage when the industry experienced a long downturn over 2022-2023. We estimate that the firm's net profit per tonne exceeded Rmb900 in 2023 (including forex gains or losses).

    　　The firm’s 150kt new production lines on track to come on stream; Changhai intends to both increase sales volume and reduce costs. The firm plans to build a 600kt intelligent production base, with production lines in Phase I (150kt) to be put into operation in 2024.

    　　Sales volume growth: We estimate that the firm's sales volume of glass fiber and related products could maintain growth of more than 10% in 2024. We believe its upside in sales volume may be stronger after its new production facilities come on stream in 2025.

    　　Cost reduction: We expect Changhai’s costs per tonne to decline steadily driven by its powder plants (likely reducing costs by Rmb100-200/t), further increases in per-capita output (200t/person at present), and potential renovation of old kilns.

    　　Changhai’s debt-to-asset ratio (30%) lower than peers; ample funds pave the way for business operation amid heavy capex in the industry. As of end-2023, the firm's net operating cash flow totaled Rmb720mn, its ratio of cash from sales to revenue reached 85%, and its debt-to-asset ratio was 30%, lower than peers. We believe Changhai's first three rounds of capacity expansion were funded from its IPO, follow-on offering, and issuance of convertible bonds, respectively. Its low leverage ratio means Changhai still has room to further expand its production capacity.

    　　How do we differ from the market? The market is focusing on the firm’s upside in sales volume created by its new production capacity. However, we focus more on its profitability.

    　　Potential catalysts: Increases in roving prices driven by improving supply-demand conditions; on-stream operation of the firm’s 150kt new production lines.

    　　Financials and valuation

    　　We expect the firm’s 2024-2025 EPS to be Rmb0.77 and Rmb1.10, implying a 23% CAGR. The stock is trading at 16x 2024e and 11x 2025e P/E. Initiate with an OUTPERFORM rating and a target price of Rmb14.6, implying 19x 2024e and 13x 2025e P/E and offering 20% upside.

    　　Risks

    　　Deteriorating industry supply-demand dynamics; overseas trade protectionism; disappointing production of new production lines.

声明：

1. 风险提示：以上内容仅来自互联网，文中内容或观点仅作为原作者或者原网站的观点，不代表本站的任何立场，不构成与本站相关的任何投资建议。在作出任何投资决定前，投资者应根据自身情况考虑投资产品相关的风险因素，并于需要时咨询专业投资顾问意见。本站竭力但不能证实上述内容的真实性、准确性和原创性，对此本站不做任何保证和承诺。
2. 本站认真尊重知识产权及您的合法权益，如发现本站内容或相关标识侵犯了您的权益，请您与我们联系删除。