ZHEJIANG LONGSHENG(600352):1H22 RESULTS IN LINE;DYE PRICES AT LOW LEVELS

类别:公司 机构:中国国际金融股份有限公司 研究员:Yaping XIAO/Siting XIA/Xiaofeng QIU 日期:2022-08-24

1H22 results in line with our forecast

    Zhejiang Longsheng announced its 1H22 results: Revenue grew 7.9% YoY to Rmb9.08bn, and attributable net profit dropped 43.6% YoY to Rmb1.43bn. We attribute the net profit decline to decreased yields from equity investment and fair value of PE projects. In 1H22, the firm’s recurring net profit dropped 16.2% YoY to Rmb1.16bn, as raw material costs increased and prices of intermediates trended downward. The firm’s 1H22 results were in line with our expectations. In 1H22, the firm’s sales volume of dye fell 4.0% YoY to 124,299t, and dye price rose 7.7% YoY to Rmb39,060/t. In 1H22, sales volume of intermediates grew 5.9% YoY to 42,525t, and average price of intermediate rose 3.3% YoY to Rmb48,127/t.

    In 2Q22, revenue grew 7.8% YoY to Rmb4.57bn, attributable net profit dropped 34.4% YoY to Rmb955mn, and recurring net profit fell 1.7% YoY ( +9.2% QoQ) to Rmb605mn.

    Trends to watch

    Results resilient. According to the National Bureau of Statistics, the printed and dyed cloth output of enterprises above designated size in the printing and dyeing industry fell 5.52% YoY to 26.91bn meters in 1H22. The printed and dyed cloth output maintained stable growth in January and February, but the YoY growth slowed due to COVID-19 resurgence in March and April. As the pandemic was brought under control, the output recovered for two consecutive months in May and June, up 6.29% MoM and 0.30% MoM. We expect the impact of COVID-19 on domestic demand for dyed cloth to ease and downstream demand to rebound. In 2Q22, Zhejiang Longsheng reported positive earnings growth despite the impact of COVID-19 resurgence, reflecting strong resilience in operating results.

    Dye prices at low levels. Due to intensifying competition in the domestic dye market, dye prices remain low at present. According to Sci99.com, prices of disperse and reactive dyes in eastern China were Rmb21,500/t and Rmb22,000/t as of August 19, 2022. We believe prices of dyes will continue fluctuating at low levels in the near term.

    Investment in real estate business to pay off. Zhejiang Longsheng focuses on the Shanghai real estate market. The construction of Huaxing New Town project started on February 15, and some residential and commercial properties of the Longsheng Fuxinli residential housing project are being handed over. Tenant acquisition and furnishing of Fuxinli project are advancing. We believe that Longsheng Fuxinli project will be delivered in 2H22, contributing revenue and net profit.

    Financials and valuation

    We keep our 2022 and 2023 earnings forecasts unchanged. We estimate that the firm’s attributable net profit will be Rmb4.06bn in 2022 and Rmb4.21bn in 2023. The stock is trading at 7.7x 2022e and 7.5x 2023e P/E. We maintain an OUTPERFORM rating. However, given the falling valuation of the overall chemical sector, we cut our target price 13.1% to Rmb13.47, implying 10.8x 2022e P/E and 10.4x 2023e P/E with 39.3% upside.

    Risks

    Dye demand disappoints; production capacity of dyes and intermediates expands significantly; sharp market declines.