HUAWANG NEW MATERIAL TECHNOLOGY(605377)：1Q23 EARNINGS SOLID;REITERATEOUTPERFORM RATING

　　1Q23 results in line with our expectations
　　Huawang New Material Technology announced its 1Q23 results: Revenue rose 21% YoY to Rmb914mn; net profit attributable to shareholders fell 4% YoY to Rmb108mn, continuing strong performance and in line with our expectations.
　　Our comments:
　　Quarterly sales volume hits record high; ASP largely flat QoQ: The new production capacity ramped up in 2022, and sales volume hit a record high of more than 65,000t in 1Q23. At end-February, the company raised prices of a small portion of base paper by Rmb200-300/t （most of which have been implemented, according to our survey） and fine-tuned its product mix, resulting in largely flat ASP MoM.
　　High inventory of raw materials weighs on 1Q23 net profit per tonne: The company’s core raw materials are wood pulp and titanium dioxide. Although titanium dioxide prices have weakened rapidly since mid-2022, the company continued to use high-priced wood pulp purchased in 4Q22 in 1Q23. We estimate that net profit per tonne of decorative base paper fell Rmb400/t QoQ to Rmb1,500/t.
　　Wood pulp trading weakens; full-year risks controllable: As wood pulps have been oversold since end-2022, we expect the wood pulp trading business to weaken notably in 2023. However, we note that profit and loss of the trading business depend on the company's procurement pace and costs, and this business did not suffer a loss in 1Q23.
　　Cash flow weakens in the short term; strong balance sheet: In 1Q23, operating cash flow weakened to -Rmb214mn, mainly due to concentrated payment for raw materials. The company plans to expand production capacity by 480,000t in Maanshan with capex of Rmb3.2bn. The company’s debt-to-asset ratio and net gearing ratio are only 33% and -36% in 1Q23, implying stable and moderate capacity expansion compared with peers and ample room for leveraging up.
　　Trends to watch
　　Stress test period highlights corporate value; earnings of main business highly visible in 2023. The company estimates its 80,000t production capacity in Maanshan will come online in 1H23, and we estimate its full-year sales volume will rise 20% YoY, laying a foundation for high revenue growth. Meanwhile, the company continues to explore the export market and roll out new product categories to improve its product mix. According to our survey, the company adopts the same-price sales strategy in Europe, and its profit margin outpaces that in the domestic market. In 2023, it targets export revenue proportion of 20-25%.
　　Looking ahead, we expect 2023 profit to bottom out thanks to two factors.
　　Falling prices of wood pulp and titanium dioxide to ease cost pressure: The company’s core raw material prices have been at historical highs in 2022. At present, pulp and titanium dioxide prices have fallen significantly from highs in 2022, and we expect the company’s cost pressure to ease starting from 2Q23.
　　Housing completions recovering: More than 40% of the end-market demand for decorative base paper is customized home furnishings. CICC real estate team expects GFA completions to increase more than 10% YoY in 2023.
　　Multi-category expansion based on base paper; clear medium-term growth path. We believe the company will have 350,000t of base paper production capacity by end-2023, and its market share will remain stable at 25% by then. We are upbeat on the steady expansion of 400,000t of new product categories （industrial, medical, and food packaging paper） over 2024-2025, opening a new chapter for the ramp-up of multiple product categories, and see room for re-rating. In addition, we are upbeat on the company's accelerated market share gains in Europe and Southeast Asia, and expect exports to account for more than 30% of its total revenue in the medium term.
　　Financials and valuation
　　Considering the higher-than-expected cost relief, we slightly raise our 2023 earnings forecast 5% to Rmb572mn and maintain our 2024 earnings forecast at Rmb686mn. The stock is trading at 11x 2023e and 9x 2024e P/E. We maintain OUTPERFORM rating and target price of Rmb25, implying 15x 2023e and 12x 2024e P/E, offering 32% upside.
　　Risks
　　Sharper-than-expected decline in pulp prices; disappointing recovery of real estate demand; intensifying competition.
【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。

   【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。