M&G STATIONERY(603899)：COVID-19 RESURGENCE WEIGHS ON 2Q22 RESULTS;MARGINAL IMPROVEMENT LIKELY IN 3Q22

What's new

    We invited core managers of M&G Stationery to the CICC Investment Strategy Conference 2H22. We are upbeat on the firm’s medium to long-term growth prospects, given its focus on strengthening the core stationery business while growing new businesses such as Colipu and M&G Shop.

    Comments

    Stationery business faced short-term pressure from COVID-19 resurgence in Shanghai; earnings likely to improve in 3Q22.

    Traditional stationery business: The recent COVID-19 resurgence in Shanghai weighed on the operation of the firm’s base in eastern China and logistics. We think its revenue from the traditional stationery business might come under pressure in 2Q22. Given resilient demand for stationery and our grassroots survey showing that the firm’s inventory in channels has dropped to a low level, we expect its revenue to recover in 3Q22 as COVID-19 is brought under control, logistics return to normal, and a new college year starts.

    Large retail stores: We expect customer traffic and revenue of retail business such as M&G Shop to decline YoY in 2Q22. If COVID-19 is brought under control, offline traffic will likely recover and revenue from large retail stores will likely edge upward in 3Q22.

    Corporate services: We think the suspension of production and operation and the disruptions to logistics amid COVID-19 resurgence have affected M&G Stationery’s orders from corporate clients. However, we remain upbeat on the rapid growth of Colipu.

    Improving product mix, channel structure, and operating capability to boost medium to long-term growth. Products: The firm is increasing the proportion of high-end products in its core traditional business. In addition, it is proactively optimizing products sold in large retail stores. As a result, the proportion of self-developed products and best-selling products is rising. Channels: The firm has developed a comprehensive, multi-layer channel network. Its online business and direct-to-customer business are growing rapidly. Operation: M&G Stationery’s digital transformation is conducive to improving labor efficiency and operating efficiency of stores. The firm is strengthening its competitiveness in products, channels, and operation, which we believe will bolster its medium to long-term growth.

    We are upbeat on M&G Stationery, given its leading position in the domestic stationery industry and its core competitive advantages. In our opinion, the firm’s traditional business has strong competitive advantage and will likely maintain stable growth. We expect its traditional business to grow faster than most peers and thus gain larger market share. We think the firm will likely continue to acquire large clients with huge growth potential for Colipu and its earnings from Colipu will likely continue to increase thanks to economies of scale. In addition, we expect its large retail stores to turn around with higher operating efficiency, optimized product mix, and stronger marketing efforts. We are upbeat on the firm's overall competitive advantages and growth prospects in the medium and long term, given its strategy of strengthening the core stationery business while growing new businesses.

    Financials and valuation

    We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 27x 2022e and 23x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb64, implying 33x 2022e and 28x 2023e P/E with 21% upside.

    Risks

    Sharp fluctuations of raw material costs; new business model disappoints; policy uncertainty.