RUNTU(002440)：2021 1Q22 RESULTS IN LINE;DYE PRICES AT BOTTOM

2021 and 1Q22 results in line with our forecast

    Runtu announced 2021 results: Revenue grew 6.6% YoY to Rmb5.57bn, net profit attributable to shareholders rose 6.0% YoY to Rmb836mn, and recurring net profit attributable grew 9.2% YoY to Rmb607mn. Revenue and profit is in line with our forecast.

    Growth was largely supported high prices of basic chemical products that boosted earnings of other chemical ingredients. Specifically, revenue from dye, auxiliaries and other chemical ingredients changed -9.9%, +28.8% and +59.0% YoY to Rmb3.59bn, Rmb253mn and Rmb1.50bn. The GM of dye, auxiliaries and other chemical ingredients changed -4.22ppt, +10.65ppt and +16.12ppt YoY to 25.68%, 29.57% and 32.05%.

    In 4Q21, revenue fell 16.1% YoY to Rmb1.32bn and net profit attributable dropped 27.9% to Rmb167mn. In 1Q22, revenue and net profit attributable rose 11.5% and 19.6% YoY to Rmb1.58bn and Rmb211mn; recurring net profit attributable declined 7.6% YoY to Rmb122mn. Revenue and profit is largely in line with our forecast, as high raw material prices and rock-bottom dye prices weighed on earnings growth.

    Trends to watch

    Dye prices bottom out. Data from the National Bureau of Statistics shows the output of printed and dyed fabrics by enterprises above a designated size grew 11.76% YoY to 60.58bn meters in January-December 2021, a high for the past in the past 10 years. In January-February 2022, the output of printed and dyed fabrics by enterprises above a designated size rose 5.94% YoY to 7.04bn meters, a five-year high. We expect continued recovery of end demand to enhance demand for dyes. Meanwhile, due to growing competition in the domestic dye market, dye prices are at rock bottom. As of April 29, 2022, prices of disperse dyes and reactive dyes in Jiangsu and Zhejiang were Rmb24,500/t and Rmb24,000/t. We think dye prices may fluctuate at the bottom level in the short term.

    Strong competitiveness in dye business. The firm has a production capacity of 230,000t for dyes, including 110,000t for disperse dyes and 100,000t for reactive dyes. Also, Runtu has expanded its presence in the dye value chain and has production capacity for key intermediates such as H-acid, para-ester and reductants. We believe the company's efforts to expand its presence in key intermediates will help it secure raw materials, reduce dye costs and enhance the competitiveness of its dye business.

    Watch production resumption of subsidiaries in northern Jiangsu. The firm’s subsidiaries Jiangsu Mingsheng and Jiangsu Yuanzheng have resumed production while Jiangsu Helirui is preparing to resume production. The three subsidiaries recorded a combined loss of Rmb295mn in 2021, dragging Runtu’s earnings. We suggest watching the progress of production resumption in the firm’s base in northern Jiangsu, which will likely boost earnings growth, if the resumption goes as planned.

    Financials and valuation

    Given lower-than-expected dye prices in the short term, we lower our 2022 net profit forecast 3.0% to Rmb904mn, and introduce our 2023 net profit forecast of Rmb1.01bn. The stock is trading at 9.9x 2022e and 8.9x 2023e P/E. Considering lower earnings forecasts and industrial valuations, we cut our TP 7.8% to Rmb11.06 (14.1x 2022e and 12.6x 2023e P/E), offering 42.0% upside from the current price. Maintain OUTPERFORM.

    Risks

    Disappointing recovery of demand for dyes; substantial expansion of production capacity for dyes and intermediates; disappointing production resumption in the northern Jiangsu base.