LINUO TECHNICAL GLASS(301188)：LEADING THE MEDIUM BOROSILICATE TUBULAR VIAL MARKET

　　Core views:
　　Linuo Technical Glass is a leading producer of special glass with strong competitiveness across its three business segments of medical glass, heat-resistant glass, and electric lighting glass. With the promotion of consistency evaluation and correlation evaluation policies, the penetration rate of borosilicate glass is likely to increase rapidly. As a leading enterprise of medium borosilicate tubular vials in China, Linuo presents revenue elasticity under capacity expansion and self-produced glass tubes, while the cost end has room to decrease as well. Meanwhile, Linuo has ambitious capacity planning for molded bottles/vials, which may warrant revenue on par with that of the pharmaceutical glass business. For high borosilicate glass, with the continuous expansion of new categories, its profitability has room to improve. We see strong prospects of earnings growth for the Company and initiate coverage with a “BUY” rating and a target price of Rmb22 on 25x 2023E PE.
　　Abstract:
　　The leading special glass producer with strong competitiveness.
　　Founded in 2001, Linuo Technical Glass is the special glass subsidiary of Linuo Group. It focuses on three main businesses of medical glass, heat-resistant glass and electric lighting glass, with a product mix of high/medium/low borosilicate glass. All of the three businesses boast strong competitiveness. The Company has a stable ownership structure, providing shareholders with future growth prospects, and the core employees’ shareholding will keep drive the development of the Company in medium and long term development. In recent years, Linuo’s operating revenue and attributable net profit (ANP) have grown steadily, with a 14.13%/23.91% CAGR in 2018-21, respectively, implying an increasing profitability.
　　Medical glass industry: Medium borosilicate medical glass penetrating rapidly driven by the policies, with domestic replacement showing broad room.
　　Medium borosilicate medical glass is a pharmaceutical packaging material with relatively high performance. Compared with low borosilicate glass, it has significant advantages in chemical stability, mechanical strength and impact resistance. Promoted by the consistency evaluation policy of generic drugs, the replacement process of neutral borosilicate glass in China will be accelerated. Under the correlation evaluation system, the incremental market share will be concentrated to leading producers. In addition, there are high barriers in the production of medium borosilicate glass tubes. The instability of production has affected the market recognition of domestic medium borosilicate pharmaceutical glass tubes. Therefore, medium borosilicate glass tubes are basically dependent on import currently, which in turn presents a broad market space for domestic replacement under the goal of independent control.
　　Market leader of medium borosilicate tubular vials, and molded bottles may become the next medical glass business.
　　Linuo is a leading producer of medium borosilicate tubular vials. After years of development and accumulation, it has gained a good reputation and accumulated a large number of high-quality pharmaceutical production enterprise customers with strong comprehensive strengths. In addition, the Company’s shareholders include Fosun and China National Pharmaceutical Investment (CNPIC), presenting broad business synergy space in the future. In terms of pharmaceutical glass, the Company has an ambitious capacity plan in the future and the capacity of medium borosilicate tubular vials will likely reach 2.6bn pieces next year. At the same time, Linuo’s first brown medium borosilicate glass tube production line has been put into operation, and the capacity of medium borosilicate glass tube will be increased by 5kt. With the expansion of tubular bottle/vial capacity and the continuous use of self-produced glass tubes, medium borosilicate tubular vials will gain elasticity in its demand side, and will see a large room for cost decline. In addition, the Company also plans a large capacity of medium borosilicate molded bottles, which will likely warrant revenue on par with that of the pharmaceutical glass business.
　　High borosilicate glass business: Excellent customer structure and improved profitability by new categories of business.
　　Linuo has expanded to cover the heat-resistant glass business since 2002. With relatively profound technical reserves, it has become the leader of the heat-resistant glass. It adopts the key customer cooperation mode, and has established good cooperation relationships with key customers. In the future, it will improve profitability through its own brand building and new category expansion; In terms of the electric lighting source business, the Company’s products are mainly used for the production of downstream high-end high intensity discharge (HID) electric lighting sources. Compared with ordinary glass, electric lighting glass has higher requirements on technologies. The gross profit margin (GPM) of the business is maintained at 35%, and the profitability is stable. In the future, the Company plans to develop light-emitting diode (LED) lenses to further expand its market.
　　Potential risks: Macroeconomic pressure; new business expansion not up to expectations; policy changes; rising raw fuel costs; a slump in overseas demand.
　　Investment strategy: As a leading enterprise of medium borosilicate tubular vials in China, Linuo presents revenue elasticity under capacity expansion and self-produced glass tubes, while the cost end has room to decrease as well. Meanwhile, Linuo has ambitious capacity planning for molded bottles/vials, which may warrant revenue on par with that of the pharmaceutical glass business. For high borosilicate glass, with the continuous expansion of new categories, its profitability has room to improve. We forecast the Company’s ANP to be Rmb106mn/200mn/266mn in 2022E-24E, corresponding to EPS forecast of Rmb0.46/0.86/1.16. Considering the valuation of comparable companies and the growth prospect of the Company, we assign a target price of Rmb22 on 25x 2023E PE and initiate coverage with a "BUY" rating.
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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。