NHU COMPANY(002001)：IMPROVING METHIONINE DEPLOYMENT;EXPECT GROWTH IN ALL SEGMENTS-格隆汇

机构：中金公司
研究员：Yaping XIAO/Xiongwei JIA/Xiaofeng QIU

　　What's new
　　NHU announced on December 27, 2021 that it had signed an agreement with Sinopec Zhenhai Refining & Chemical Company (Sinopec Zhenhai) to invest around Rmb3bn in the construction of a methionine production facility and establish a joint venture (JV) to operate the project. The JV will have registered capital at 30% of the total investment amount of the project, with the two parties each holding a 50% stake in the JV.
　　Comments
　　Methionine industry to see turnaround in supply-demand dynamics　in medium-to-long term. Methionine is primarily used in feeds to promote growth of poultry and livestock, increase the quantity of lean meat, and shorten the feeding cycle. Global methionine production was around 1.5mnt in 2020, with the global methionine market reaching nearly Rmb30bn. The nine major players in this market are Evonik, Adisseo, Novus, Sumitomo Chemical, NHU, Purple chemical, CJ Bio, Hebang Biotechnology, and Volga, with the combined market share of CR4 at 85% in 2019. We expect around 180,000t of new methionine capacity to come on stream in 2022 (about 150,000t in 2023). We also expect global methionine demand to maintain an annual growth rate of 5-6% over the next few years, suggesting a demand increase of nearly 90,000t/year. We think that competition in the methionine industry will intensify in the near term, and that the global supply of methionine will exceed demand. We expect the methionine industry to see a turnaround in supply-demand dynamics in the medium-to-long term.
　　Innovation to fuel capacity expansion. NHU expanded into the　methionine sector in 2005 and saw the first positive effects from its R&D in July 2014. In January 2017, trial operation of the firm’s Phase I 50,000t/yr methionine production facility was successful, and it was China’s first methionine production facility with independent intellectual property rights.The Phase II 100,000t/yr methionine production facility came online in October 2020. Construction of its Phase III 150,000t/yr methionine project is underway, and we expect the new capacity to come on stream in 2023.
　　Cost advantage strengthened; deployment in methionine improving.NHU subsidiary, Shandong NHU Amino Acid, booked revenue of Rmb1.18bn in 1H21 and Rmb2.02bn in 3Q21 with net profits of Rmb304mn and Rmb479mn, and net margins at 25.8% and 23.7%.
　　This suggests that the firm’s methionine cost was as low as that of the leading overseas companies, thanks to its improving manufacturing techniques. Sinopec Zhenhai, a subsidiary of Sinopec Group, has clear advantages in raw material supply, project approval, and plant operations.If the new project progresses smoothly, we expect NHU to become the world’s third-largest methionine supplier.
　　Upbeat on growth potential. We are optimistic about the growth potential of the firm’s nutrient, flavor and fragrance, and polymer material segments in the medium term. We think the new policy on carbon emissions will alleviate market concerns about the firm’s project growth as well as the drag on valuation.
　　Valuation and recommendation
　　We maintain our 2021 and 2022 earnings forecasts of Rmb4.61bn and Rmb5.09bn. The stock is trading at 16.7x 2021e and 15.1x 2022e P/E. We are upbeat on long-term growth potential. We maintain OUTPERFORM and our target price of Rmb39.78 (20.2x 2022e P/E), offering 33.1% upside.
　　Risks
　　Disappointing product prices and/or progress of new projects; a sharp increase in raw material prices.