JINHE INDUSTRIAL(002597)：PRICES OF SWEETENERS SOARING;DEMAND FOR SUCRALOSE TO REMAIN SOLID

Preannounced 2021 earnings up 29.43-60.05% YoY

    Jinhe Industrial has preannounced its 2021 results: Attributable net profit rose 29.43-60.05% YoY to Rmb930mn-1.15bn, and recurring net profit increased 40.0-82.8% YoY to Rmb798mn-1.04bn, thanks to its new addition of 5,000t/yr sucralose capacity and rising prices of sucralose, acesulfame, and maltol.

    Trends to watch

    Rising prices of food additives to fuel earnings growth in 4Q21. As demand for sweeteners increases rapidly and raw material costs continue growing, the supply of sweeteners has tightened and prices of sucralose and acesulfame have soared. According to Baiinfo, the ASP of sucralose and acesulfame in the market rose 80% QoQ and 33% QoQ to Rmb435,000/t and Rmb93,400/t in 4Q21. Prices of maltol also increased rapidly thanks to robust demand in the peak season and higher raw material prices. As a result, the company’s earnings improved. According to its preannouncement, its attributable net profit rose 16.8-135.5% YoY to Rmb217-437mn, and recurring net profit increased 64-258% YoY (-7.2%- +102.3% QoQ) to Rmb207-451mn in 4Q21. Given the high proportion of long-term orders, we think the rising sweetener price has not been fully reflected in Jinhe’s 4Q21 results. We expect its earnings to continue to rise quarter by quarter in 2022 as new long-term orders are signed.

    Demand for sucralose to remain robust in the long term. As consumers’ demand for healthy beverages increases, we expect sucralose demand to rise rapidly in the next few years thanks to its advantages in safety, taste, and prices. The competitive landscape of the sucralose market is relatively stable, and Jinhe has a global market share of over 50%. At present, Jinhe’s peers have not announced capacity expansion plans, and we think government approval of new projects will likely face challenges from strict environmental regulations and energy consumption curbs. Therefore, we foresee limited new sucralose capacity and a promising outlook for sucralose prices in the long term. Thanks to its new 5,000t/yr sucralose capacity and technological upgrade, Jinhe now has over 10,000t/yr sucralose output. The company plans to further increase its output on the back of technological upgrade. We expect its sucralose sales volume and market share to continue to increase. In addition, we think the company’s costs on sucralose will also drop, enhancing its earnings from the sucralose business.

    Valuation and recommendation

    We leave our 2021 earnings forecast unchanged at Rmb1.07bn, and raise our 2022 earnings forecast 25% to Rmb2.01bn to reflect our optimistic outlook for sucralose prices. We introduce our 2023 earnings forecast of Rmb2.20bn. The stock is trading at 26.9x 2021e, 14.3x 2022e, and 13.1x 2023e P/E. We lift our target price 8.3% to Rmb65, implying 18.1x 2022e and 16.5x 2023e P/E with 26.6% upside.

    We maintain OUTPERFORM.

    Risks

    Sucralose prices lower than we expected; intensifying competition in the acesulfame market.