HUANGMA TECHNOLOGY(603181)：1Q22 RESULTS SLIGHTLY BEAT;UPBEAT ON GROWTH OF PRODUCTS WITH LOW SALES VOLUME

　　1Q22 results slightly beat market expectations

    Huangma Technology (Huangma) announced 1Q22 results: Revenue rose 20.1% YoY to Rmb616mn, and attributable net profit grew 59.3% YoY to Rmb130mn with EPS of Rmb0.22, in line with expectations. Recurring net profit rose 48.5% YoY to Rmb95mn and non-recurring gains and losses mainly came from government subsidies on capacity relocation.

    　　The firm announced that it will revise its share buyback plan from Rmb30-60mn to Rmb65-130mn. The repurchased shares will be used mainly for the employee stock ownership plan (ESOP), which demonstrates the firm’s confidence, in our view.

    　　Trends to watch

    　　Optimizing product structure; continuing to focus on products that usually have low sales volume. Compared with products that usually have low sales volume, products typically with high sales volume are less profitable. Huangma’s 2021 sales of products that usually have high sales volume fell to 71,000t, and we expect it to gradually drop to 50,000t with a declining proportion of total sales. The firm’s products that usually have low sales volume covered 15 major business segments as of 2021, including new segments polyetheramine and high-end electronic chemical application. Huangma adds nearly 100 new products per year, with the total number of products rising to over 1,700 in 2021. The firm’s 1Q22 sales of products with typically low sales volume grew robustly 22% YoY to 33,200t.

    　　Operations solid; MS resin business ramping up as expected. Modified silicone (MS) adhesives, as an important category of adhesives, are widely used overseas. We expect the application of MS adhesives to accelerate in the domestic market with Huangma’s breakthrough in MS resin. The firm targets total MS resin production capacity of 50,000t, and intends to start operation in different phases. To date, Huangma’s commercial production of MS resin has begun. We expect the firm’s MS resin output to exceed 10,000t in 2022. We expect the firm’s MS resin business to contribute about Rmb400mn to 2022 revenue assuming a price at Rmb35,000/t.

    　　Rapidly expanding capacity; enriching product lines; polyetheramine business to grow rapidly. The CICC power and new energy team expects China’s annual average new wind-power installation to exceed 55GW and 70GW in 2021-2025 under baseline and optimistic scenarios. The team believes the installation in 2023 will be even higher than the expected average level and anticipates a one- to two-year boom in the wind power industry. Huangma’s 2021 results report shows that its first 4,000t polyetheramine production line was implemented in the non-wind power industry, and its second polyetheramine production line started operation in 1Q22, marking its official entry into the wind power segment. In addition, the firm upgraded the existing plants, and we expect the production capacity to increase 10,000t. We estimate its polyetheramine sales will exceed 10,000t in 2022, contributing over Rm300mn to total revenue.

    　　Financials and valuation

    　　We maintain 2022 and 2023 earnings forecasts at Rmb485mn and Rmb568mn. The stock is trading at 17x and 15x 2022e and 2023e P/E. We maintain an OUTPERFORM rating and TP of Rmb18, implying 22x and 19x 2022e and 2023e P/E with 26% upside.

    　　Risks

    　　Economic downturn; slow progress of new material project; safety risks.