CHINA JUSHI(600176)：STRUCTURAL ADVANTAGES CONTRIBUTING; ROVING SALES VOLUME GROWS DESPITE DOWNTURN

　　Preannounces earnings down 55% YoY
　　China Jushi recently preannounced its 1H23 results: Attributable net profit fell 55% YoY to Rmb1.89bn and recurring net profit declined 57% YoY to Rmb1.22bn.
　　In 2Q23, attributable net profit rose 5% QoQ to Rmb970mn, and recurring attributable net profit grew 48% QoQ to Rmb730mn. According to the firm’s announcement, its earnings fell sharply YoY due to the sluggish industry demand in 1H23, product prices fluctuating at low levels, and the high prices in 2Q22. However, the firm’s earnings improved marginally QoQ. We think its recurring attributable net profit slightly beat market expectations mainly thanks to the strong sales volume for rovings and the contribution from FX gains.
　　Trends to watch
　　Roving sales volume impressive; structural advantages still contributing in 2Q23. We estimate that sales volume of the firm’s roving products rose about 20% QoQ in 2Q23, mainly driven by the ramp-up of yarns for wind power. If we do not exclude the FX gains from renminbi depreciation, we estimate a potential QoQ recovery of about Rmb800 for the net per-tonne profit of the firm’s roving products in 2Q23 compared with 1Q23, which also suggests that its earnings have nearly hit the bottom.
　　Electronic fabric prices weak; cost advantage becomes increasingly important when prices are bottoming. We estimate tax-exclusive ASP of the industry’s electronic fabrics at around Rmb3.1/m in 2Q23, close to the costs of small companies. Recently, some manufacturers raised product prices despite little changes in the sales and production of electronic fabrics, reflecting the pressure on earnings at small companies. We estimate the firm’s GM at 10-20% at this price level.
　　Poised to recover amid bottoming prices; upbeat on HoH improvement in roving sales volume in 2H23; net profit per tonne to stabilize and rebound. We believe that sales of yarns for wind power will likely improve HoH in 2H23, as wind power facilities are usually installed in the second half of the year due to seasonality. We expect industry leaders to be the first to see sales volume recovery. We also suggest watching the possible improvement in demand for automotive thermoplastic yarns in　2H23. In our view, if market demand recovers as expected, Jushi will likely see its prices and net profit per tonne pick up further.
　　Even if the market demand only recovers to a limited extent and product prices fail to increase as scheduled, we think it will stabilize the industry and reduce the speed of capacity expansion of peers. In addition, we think roving will be applied in more scenarios. We are optimistic that glass fiber combined with polyurethane composites will take the lead in replacing aluminum alloy in the offshore PV industry. Zhenshi, Jushi’s downstream customer produces PV frames using polyurethane composites.
　　Electronic fabrics have been bottoming for a long time; we see limited pressure from new production capacity. The electronic fabrics industry has been bottoming for about one and a half years. We believe incremental production capacity should be limited in the future. We think Jushi will be able to raise prices if market demand from consumer electronics and other downstream segments improves.
　　Financials and valuation
　　We think the slower-than-expected recovery of roving and electronics fabrics demand increased the difficulty of price hike. Therefore, we cut our 2023 and 2024 EPS forecasts by 25% and 20% to Rmb0.98 and Rmb1.14. The stock is trading at 14x 2023e and 12x 2024e P/E. We maintain an OUTPERFORM rating. Considering that the firm’s earnings are hitting bottom levels, we lower our target price by 5% to Rmb15.7, implying 16x 2023e and 14x 2024e P/E, offering 12% upside.
　　Risks
　　Recovery of roving product and demand for electronic fabrics disappoints; capacity expansion exceeds expectations.
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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。