YUNNAN ENERGY NEW MATERIAL(002812)：PREANNOUNCED 2021 RESULTS SLIGHTLY BEAT; SEPARATOR SALES VOLUME AND PRICES TO RISE IN SHORT TERM

Preannounced 2021 earnings up 138-147% YoY

    Yunnan Energy New Material (YENM) has preannounced its 2021 results, estimating that attributable net profit grew 138-147% YoY to Rmb2.66-2.76bn, and recurring net profit rose 158-168% YoY to Rmb2.56-2.66bn, slightly beating expectations due to higher shipment.

    Trends to watch

    Production output growing; high QoQ growth in net profit per square meter. We estimate that the company’s shipments of separator increased 30% QoQ to 1.07bn square meters in 4Q21, including 20mn sqm carried over from 3Q21. Overall shipments stood at around 3bn square meters in 2021. We estimate net profit per square meter of separator was Rmb0.92 in 4Q21, up 7% QoQ. According to our estimation, net profit from traditional businesses reached over Rmb20mn in 4Q21and over Rmb100mn in 2021.

    Strong downstream demand; separator sales volume and prices to rise in 2022. We estimate that installed capacity of electric vehicle (EV) lithium-ion batteries (LiB) could exceed 700GWh in 2022, implying demand for over 12bn sqm of separator. We expect new production capacity in the separator industry to be limited due to constraints on equipment supply. Therefore, we think that in 2022-2023, the balance between wet-process separator supply and demand will remain tight, and separator prices will rise steadily. As of end-2021, the firm’s production capacity for wet-process separator reached 5bn sqm. In December, its monthly output increased to around 400mn sqm. Meanwhile, the company plans to add more than 25 new production lines in 2022. We expect its separator shipments to exceed 5.5bn sqm in 2022, with its global market share rising above 40%.

    Inline coating (ILC) technology to further cut costs; customer base expanding. As of end-2021, the company operated 11 ILC production lines and expects to have 34 ILC production lines by end-2022. We expect the ILC production line to improve the yield of coating film by more than 10%, and to cut the overall cost of separator production. The ILC technology has been verified and tested by customers, and the firm’s supply to numerous major clients is ramping up rapidly.

    Strong ties with major downstream clients; market share to increase in medium to long term. In 2021, the company established joint ventures with EVE and CATL to build separator capacity. We think that the firm has strong ties with major downstream clients on the back of its advantages in cost, technology and economies of scale. We expect YENM’s share of the global separator market to increase to 50% over the medium to long term, given a potential rise in its separator production and sales.

    Valuation and recommendation

    Given the rising separator prices amid a tight balance between supply and demand, as well as the firm’s expanding capacity and output and a potential decline in cost thanks to the adoption of ILC technology, we raise our net profit forecast 8% to Rmb2.71bn for 2021 and 23% to Rmb5.63bn for 2022, and introduce our 2023 net profit forecast of Rmb8.55bn. The stock is trading at 37.7x 2022e P/E. Considering the falling average sector valuation, we maintain OUTPERFORM and our TP of Rmb330, implying 52.3x 2022e P/E, offering 38.7% upside.

    Risks

    Disappointing global sales volume of alternative fuel vehicles; separator capacity expansion faster than expected; sharper-than-expected price decline caused by intensified competition.