RUNTU(002440)：1H22 RESULTS IN LINE;DYE PRICES AT BOTTOM

　　1H22 results in line with our expectations
Runtu announced its 1H22 results: Revenue rose 24.1% YoY to Rmb3.42bn, attributable net profit grew 24.7% YoY to Rmb500mn, and recurring net profit increased 10.3% YoY to Rmb339mn. Specifically, its revenue from dye, auxiliaries and other chemical ingredients grew 5.0%, 47.5% and 52.7% YoY to Rmb1.94bn, Rmb186mn and Rmb1.09bn. Runtu’s gross margin (GM) of dye and auxiliaries dropped 7.74ppt and 6.46ppt YoY to 19.33% and 25.26%, while GM of other chemical ingredients grew 1.47ppt YoY to 33.89%. The results were in line with our expectations, and we attribute the earnings growth to the revenue increase in other chemical ingredients. In 2Q22, its revenue rose 37.4% YoY to Rmb1.84bn, attributable net profit grew 28.7% YoY to Rmb289mn, and recurring net profit increased 23.8% YoY to Rmb217mn.
　　Trends to watch
　　Dye prices at bottom. According to the National Bureau of Statistics, the output of printed and dyed fabrics by enterprises above a designated size fell 5.52% YoY to 26.91bn meters in January-June 2022. The production of printed and dyed fabrics maintained stable growth in January and February. However, due to the resurgence of COVID-19, the cumulative production growth narrowed YoY gradually in March and April. In April, the production of printed and dyed fabrics hit a low. As the domestic COVID-19 resurgence eased, the output recovered and increased 6.29% and 0.30% MoM in May and June, respectively. We expect downstream demand to likely gradually recover as the impact of COVID-19 on domestic dye demand is likely to ease. Meanwhile, due to growing competition in the domestic dye market, dye prices are at the bottom. According to chem99.com, as of August 29, 2022, prices of disperse dyes and reactive dyes in Eastern China were Rmb21,500/t and Rmb21,500/t. We think that dye prices may fluctuate at the bottom level in the short term.
　　Strong competitiveness in the dye business. The firm has a production capacity of around 230,000t for dyes, including 110,000t for disperse dyes and 100,000t for reactive dyes, ranking second among its peers. Also, Runtu has expanded in the dye value chain through upstream integration. With production capacity for key intermediates such as H-acid, para-ester, and reductants, the firm has established a comprehensive industrial chain from thermal power station, steam, chlorine and sodium hydroxide to intermediates and dye. We believe the firm's efforts to expand in key intermediate markets will help it secure raw materials, reduce dye costs and enhance the competitiveness of its dye business.
　　Watch production resumption of subsidiaries in northern Jiangsu. The firm’s subsidiaries Jiangsu Mingsheng and Jiangsu Yuanzheng have resumed production, while Jiangsu Helirui is preparing to resume production. The three subsidiaries recorded a combined loss of Rmb88.93mn in 1H22. The loss narrowed Rmb51.64mn YoY, but still dragged Runtu’s earnings. We suggest watching the progress of production resumption in the firm’s base in northern Jiangsu, which is likely to reduce losses and boost earnings growth if the resumption goes as planned.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts at Rmb904mn and Rmb1.01bn. The stock is trading at 10.5x 2022e and 9.4x 2023e P/E. We maintain OUTPERFORM and a TP of Rmb11.06 (14.1x 2022e and 12.6x 2023e P/E), offering 34.1% upside.
　　Risks
　　Disappointing recovery of demand for dyes; substantial expansion of production capacity for dyes and intermediates; disappointing production resumption in the northern Jiangsu base.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。