Shengyi released its 3Q results. Revenue was RMB4,467mn with YoY growth of 3.8% growth and QoQ growth of 8.3%. Net profit was RMB344mn with YoY growth of 31.6% and QoQ growth of 12.0%. GPM expanded from 19.7%/18.9% in 1Q23/2Q23 to 20.0% in 3Q23, and its NPM expanded from 6.6%/7.4% in 1Q23/2Q23 to 7.7% in 3Q23. We see Shengyi is poised to enjoy the recovery in the CCL sector given its leading position and broader end market exposure. We upgrade Shengyi to BUY, with TP adjusted to RMB20.4. But we maintain Shennan at HOLD as we think PCB recovery is slower than CCL.

Decent 3Q results. We observed that the Company's downstream customers have nearly completed their destocking goals, and there is an accelerated recovery in overall demand during 3Q, possibly marking the beginning of a new restocking cycle. Notably, we have witnessed a surge in demand, particularly in the auto and mobile sectors, which have boosted the Company's CCL sales. Furthermore, compared to its industry peers, the Company has solidified its position as an industry leader, evidenced by its consistently higher utilization rates and nearly full CCL capacity utilization since mid-2023. Finally, the Company’s NPM has showed positive progress in the last two quarters.

By segment: 1) CCL revenue was close to RMB3.6bn in 3Q (c.80% of total sales). CCL sales grew roughly 10% QoQ in the past two quarters, confirming a better recovery in the CCL industry. 2) PCB revenue was RMB808mn in 3Q (18% of total sales), decreasing by 7.8% YoY and 3.9% QoQ, suggesting near-term challenges for the industry. In terms of GPM, PCB segment deteriorated further from 18.3%/16.4% in 1Q/2Q23 to 14.2% in 3Q23, while overall GPM improved from 18.9% in 2Q to 20.0% in 3Q, indicating improving GPM for CCL segment.

Upgrade to BUY, with TP adjusted to RMB20.4, based on higher 22.5x 2024E P/E multiple (vs. previous 20x). We believe the valuation is justified considering NP CAGR of 23% over 2022-25E. Potential downside risks include: 1) worse-than-expected macro environment recovery, 2) continuous ASP pressure, and 3) increasing upstream material costs.