SHANDONG PHARMACEUTICAL GLASS(600529)：LEADER IN PHARMACEUTICAL GLASS;UPGRADES IN SECTOR FUEL NEW GROWTH

　　Investment positives
　　We initiate coverage on Shandong Pharmaceutical Glass Co., Ltd. with an OUTPERFORM rating and a target price of Rmb32 (implying 28x 2023e and 23x 2024e P/E), with 23% upside.
　　Why an OUTPERFORM rating?
　　Upgrades of pharmaceutical glass products to fuel sector expansion. The consistency evaluation for medicines in China started in 2020, driving a transition towards neutral borosilicate glass packaging for injections as it becomes more widely adopted domestically”. Along with the progress in national centralized medicine procurement, domestic pharmaceutical firms are also opting for neutral borosilicate glass packaging to compete with others. These factors have contributed to the ramp-up of neutral borosilicate glass.
　　Neutral borosilicate glass is a premium material with high technological barriers to entry. For the same specifications, its prices are usually 3-4 times those of low borosilicate glass and soda-lime glass. The penetration rate of neutral borosilicate glass is about 10% in China. Under pessimistic, neutral, and optimistic assumptions with penetration rates at 20%, 30%, and 40%, we estimate the domestic market of pharmaceutical glass (excluding prefillable syringes) could expand 17%, 33%, and 50%. We foresee sector expansion driven by the upgrades going forward.
　　Benefiting from expansion in molded glass bottles; rising yield rates of glass tubes to boost growth. Shandong Pharmaceutical Glass is a dominant brand in molded bottles with a domestic market share at 80% in 2022. Thanks to advanced self-developed technologies, the firm enjoys significant competitive advantages and leads the sector in production efficiency and yield rates. Notably, it holds a 90% market share domestically for molded bottles in neutral borosilicate glass.
　　Shandong Pharmaceutical Glass raised Rmb1.8bn from a private placement in November 2022 to expand production capacity for molded bottles and prefillable syringes. As the project commences operation with an annual production capacity of 4.0bn units of molded bottles in neutral borosilicate glass, we expect significant profit expansion for the firm considering the high GM and net margin of the products. If Shandong Pharmaceutical Glass’s yield rates of neutral borosilicate glass tubes approach leading levels in the sector, we expect it to make further inroads in the market of tubular bottles in neutral borosilicate glass. We see large upside potential in the firm’s revenue and GM of tubular bottles.
　　Costs to turn around; GM to stabilize and improve. Shandong Pharmaceutical Glass’s costs have sharply increased in recent years, for items such as sodium carbonate, sodium borate, natural gas, and coal. However, its GM has remained largely stable thanks to price hikes for products and upgrades in product structure. We expect the firm’s cost to turn around, along with falling prices of natural gas and sodium carbonate as well as declining sea freight rates. In addition, we believe GM will rapidly recover amid the completion of its neutral borosilicate glass project and upgrades in product structure.
　　How do we differ from the market? We calculate the market potential from upgrades to neutral borosilicate glass. We see high visibility and stronger competitiveness for Shandong Pharmaceutical Glass amid the upgrades in the sector.
　　Potential catalysts: Accelerating centralized procurement of syringes.
　　Financials and valuation
　　Our 2023-2024 EPS forecast is Rmb1.13 and Rmb1.37, implying a CAGR of 21%. The stock is trading at 23x 2023e and 19x 2024e P/E. We initiate coverage on Shandong Pharmaceutical Glass with an OUTPERFORM rating and a TP of Rmb32 (implying 28x 2023e and 23x 2024e P/E), with 23% upside.
　　Risks
　　Fluctuation in raw material price; disappointing improvement in penetration rate of neutral borosilicate glass; intensifying market competition.
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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。