TAIHUA NEW MATERIAL(603055)：RECOVERING FROM THE IMPACT OF COVID-19;SUBSTANTIAL ROOM TO GROW IN THE LONG RUN-格隆汇

机构：中金公司
研究员：Lingyi ZENG/Bicheng CHAI/Haiyan GUO

What's new
Taihua New Materials’s split-adjusted stock price has risen 35.87% YoY to Rmb12.16 since May. Its stock price is growing faster than the average level (+14.44%) in the new material sector. We attribute this to the production and operation resumption in Shanghai and surrounding areas and the firm’s sound business recovery.
Comments
Gradually recovering from COVID-19 resurgence; orders improving MoM. Data from Baiinfo shows that the capacity utilization rate of domestic nylon filament yarn (NFY) market dropped to 77% in April from 82% in March, due to the resurgence of COVID-19, logistics pressure, and tepid downstream demand in April. Taihua New Materials also faced pressure, as reflected by its dropped sales-to-output ratio. Thanks to the easing impact of COVID-19 and recovery of logistics since late April, the firm’s business recovered rapidly in May. We think that its NFY sales-to-output ratio has returned to normal, and backlog orders for fabrics are growing.
Raw material prices edging downward; cost pressure likely to ease. Crude oil price has soared since early 2022. However, the firm’s cost of nylon chips did not increase sharply, thanks to relatively balanced supply and demand conditions in the nylon market. According to Baiinfo, PA6 chip price has increased 3-8% YoY since early 2022, largely in line with the growth of PA6 NFY price (+5-9% YoY). Taihua New Material’s PA66 NFY has differentiated competitiveness and only a few comparable products in the domestic market. Demand for PA66 NFY was strong, pushing up product price. At present, price of PA66 nylon chips has dropped, as sales volume of domestic adiponitrile products continues to drop (the price of PA66 engineering plastic chips has decreased by over 20% since early 2022). Taihua New Material continues to see improvement in PA66 NFY yield rate, and we expect the rate to reach 78-80% in 2022. We think gross margin (GM) of its PA66 NFY business will likely increase marginally.
Differentiated capacity expansion to optimize product structure. The firm’s new production line in Huai’an is progressing smoothly and will likely start production in 1H23 as scheduled. We expect the project to contribute 30,000t PA66 filament yarn and 10,000t recycled yarn based on the chemical method in 2023. We estimate GM of the firm’s PA66 NFY, recycled yarn, and PA6 NFY is around 35%, 50%, and less than 20%. Given the increasing sales volume of its above differentiated products, we expect the firm’s revenue and earnings to both improve moving forward.
Broad market; strong first-mover advantages. In the long term, we expect the domestic PA66 NFY market to expand, as the production of raw material, adiponitrile, has been localized. We are also upbeat on the growth upside of recycled yarn, given the world’s and brands’ goals to protect environment. We expect Taihua New Material to benefit from the growth of PA66 and recycled yarn based on the chemical method as a leading new material provider.
Financials and valuation
COVID-19 resurgence in 2Q22 weighed on end-market demand, logistics and shipments. Therefore, we cut our 2022 earnings forecast 4.7% to Rmb555mn and keep our 2023 earnings forecast at Rmb876mn. The stock is trading at 19x 2022e and 12x 2023e P/E. We maintain an OUTPERFORM rating. Given the firm’s differentiated competitiveness and clear long-term growth logic, we maintain our TP of Rmb14.11, implying 22x 2022e and 14x 2023e P/E with 16.0% upside.
Risks
Volatile raw material prices; slower-than-expected capacity expansion; higher-than-expected labor cost.