XINFENGMING GROUP(603225)：PESSIMISTIC EXPECTATIONS TO GRADUALLY EBB;P/B RATIO LOWER THAN 0.9X

　　1Q22 results in line with our expectation

    Xinfengming Group announced its 1Q22 results: Revenue fell 2.0% YoY (+29.3% QoQ) to Rmb10.6bn, and attributable net profit declined 42.7% YoY (-10.9% QoQ) to Rmb285mn, implying EPS of Rmb0.19, in line with our expectation.

    　　In 1Q22, the firm’s output of polyester filament yarns (PFY) rose 20.6% YoY (+3.8% QoQ) to 1.5mnt, with sales volume rising 18.0% YoY (-14.1% QoQ) to 1.22mnt. Affected by surging oil prices and disrupted logistics in eastern China, downstream demand was relatively weak and profit of PFY declined in 1Q22. The combined profit of PFY and purified terephthalic acid (PTA) reached Rmb285mn in 1Q22, and the per-tonne profit of PFY was about Rmb234.

    　　Trends to watch

    　　2Q22 earnings under pressure; earnings improvement depends on demand recovery. As severe disruptions in logistics in eastern China led to sluggish demand and increased difficulty in passing through cost pressure to downstream clients in April, PFY inventories rose to a record high with profit turning negative. Industry leaders have reduced production since April to address the problem of oversupply; considering this takes time, we expect profit of the firm’s PFY to come under pressure in 2Q22. However, we see ample room for improvement in profit given the sluggish external environment in April. The pressure on inventories at PFY plants will likely ease with the decline in PFY prices at end-April, in our view. We expect PFY demand to edge up in May-June and profit of PFY to improve slightly.

    　　Xinfengming expects both its PFY and PTA capacity to reach 10mnt; PFY sales to maintain rapid growth. The firm has 6.3mnt/yr PFY capacity and 5.0mnt/yr integrated PTA capacity. We expect the firm to have 7mnt/yr PFY capacity and 1.2mnt/yr polyester staple fiber (PSF) capacity by end-2022. The firm plans to have 10mnt PFY and 10mnt PTA capacity during the 14th Five-Year Plan (FYP) period. We expect sales volume of its PFY to grow at a high CAGR of 17.6% over 2021-2023.

    　　Financials and valuation

    　　Considering the high oil prices and disrupted logistics in eastern China may weigh on demand in 2Q22, we expect the firm’s 2Q22 earnings to miss our expectations. We lower our 2022 and 2023 net profit forecasts 21.4% and 3.7% to Rmb1.67bn and Rmb2.76bn. The stock is trading at 8.5x 2022e and 5.2x 2023e P/E, or below 0.9x 2021 P/B (a historical low). We maintain an OUTPERFORM rating and cut our TP by 13.7% to Rmb12.60 (11.5x 2022e and 7.0x 2023e P/E), offering 35.3% upside.

    　　Risks

    　　Weaker-than-expected PFY demand; oil prices plunge.