COCREATION GRASS(605099)：UPBEAT ON POTENTIAL EARNINGS RECOVERY FROM 4Q21;GLOBAL LEADERSHIP IN SYNTHETIC TURF

What's new

    We recently invited CoCreation Grass’ managers to the 2021 CICC Investment Forum to discuss the firm’s latest updates and future strategy with investors.

    Comments

    World leading synthetic turf provider by sales volume for 10 consecutive years; solid competitive technology. Certification: CoCreation offers sporting turf with world leading quality, and it has acquired certifications from international sports organizations such as FIFA. R&D capability: The company has a leading R&D team experienced in the design of high-molecular composite materials and production technology, and it has developed new products such as snow turf and pet turf. The flexible production and world leading capacity allow CoCreation to respond to diversified downstream demand in a timely manner and ensure stable delivery at the same time. Clients: CoCreation has established stable cooperation with internationally renowned artificial turf wholesalers and building materials supermarkets, such as ADEO and Turf Turf. It stands to benefit from accelerated penetration of artificial turf around the globe.

    Negatives on earnings to gradually be eased. The firm’s earnings faced downward pressure in 3Q21 from production cuts at Vietnam factories caused by the COVID-19 pandemic, raw material cost increase and shipping rate hikes. We expect impact from these negatives to gradually ease from 4Q21 onwards. We estimate the firm’s capacity utilization ratio in Vietnam dropped to 30% after the pandemic started to worsen in southern Vietnam in July and August, and has recovered to around 75% thanks to effective containment of COVID-19. We expect continued improvement in 4Q21. Meanwhile, the raw material cost and shipping rates have remained high YTD. We think shipping rates may begin to drop starting from 4Q21, and CoCreation plans to raise prices around Christmas to partially pass on the cost pressure. In addition, the company has leveraged financial instruments such as forward FX contract to cushion the impact from renminbi appreciation.

    Upbeat on competitive advantage and growth prospects secured by global leadership in synthetic turf; continued capacity expansion and launch of domestic sports turf select solutions to boost medium to long-term growth. CoCreation has been proactively expanding production capacity, and its annual capacity will increase 53% or 50mn sqm compared with end-2021 to 145mn sqm after the Phase-III and Phase-IV Vietnam factories come on stream. In light of domestic policy support for sports development, the firm launched sports turf select solutions which match turf with particle and cushion materials, and integrate surface materials with construction. We think this will help it to boost domestic sales growth.

    Valuation and recommendation

    We leave our earnings forecast unchanged. The stock is trading at 24x 2022e P/E. We maintain OUTPERFORM, and lift TP by 10% to Rmb45.8 (mainly reflecting the easing of negatives such as increase of raw material cost and shipping rates), implying 29x 2022e P/E, offering 18% upside.

    Risks

    Uncertainty over COVID-19 pandemic in Vietnam; raw material price changes; shipping rate increase; FX rate fluctuations.