1H22 results in line with our expectation

Zijiang Enterprise Group announced 1H22 results: Revenue fell 5.1% YoY to Rmb4.62bn, net profit dropped 29.5% YoY to Rmb233mn, and recurring net profit fell 30.0% YoY to Rmb230mn, in line with our expectations.

Revenue rose 4.4% YoY to Rmb2.35bn in 1Q22, but fell 13.2% YoY to Rmb2.27bn in 2Q22. Net profit dropped 2.0% and 46.0% YoY to Rmb121mn and Rmb111mn in 1Q22 and 2Q22.

Trends to watch

Revenue declined due to the impact of the COVID-19 pandemic, but the aluminum plastic film (APF) business continued to grow rapidly. Revenue fell 5.1% YoY in 1H22.

1) APF: The APF industry maintained robust growth momentum. Zijiang’s production capacity climbed rapidly amid the continued developing customers. In 1H22, Zijiang’s APF revenue and sales volume rose 63.8% and 72.3% YoY to Rmb301mn and 18.02mn square meters.

2) Other businesses: Affected by the domestic pandemic resurgence, the company’s packaging business and trading business was under pressure in 1H22. The domestic beverage demand has declined, and the pandemic resurgence in Shanghai has also dampened the company’s operation and production.

Rising prices of raw materials weighed on profitability. Gross margin fell 1.24ppt YoY to 20.5% in 1H22, due to the rising prices of upstream raw materials such as PET, CPP and aluminum, and the low capacity utilization rate dragged by the pandemic. Selling and financial expense ratios fell 0.3ppt and 0.1ppt YoY to 2.17% and 1.04%, while administrative and R amp;D expense ratios rose 0.2ppt and 0.3ppt YoY to 6.09% and 3.18%. The company further increased R amp;D investment. Net margin dropped 1.7ppt YoY to 5.03% amid the falling gross margin.

We believe the APF business has a bright outlook; we suggest watching for a short-term recovery in the packaging business.

1) APF: The APF industry maintains rapid growth thanks to the rapid growth of downstream lithium-ion batteries (LiB) and rising penetration rate of soft-pack LiB. We expect APF sales volume to grow at a CAGR of 26.8% in 2021-2025. Zijiang has established a solid partnership with BYD and CATL thanks to its strong R amp;D advantage and leading product performance. The company’s Maanshan project has been put into trial production in the middle of 2022, and the construction of its Zizhu project is progressing smoothly. We expect this business to grow rapidly thanks to the fast expansion of production capacity and expanding customer base.

2) Packaging business: The domestic COVID-19 resurgence dampened the packaging business demand in 2Q22. The elevated prices of raw materials dampened profitability of the packaging business. We expect revenue and profitability of the packaging business to improve significantly thanks to the easing pandemic condition and falling prices of raw materials.

Financials and valuation

We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 18x 2022e and 12x 2023e P/E. Maintain OUTPERFORM rating and target price of Rmb8.24 (24x 2022e and 17x 2023e P/E), offering 32% upside.

Risks

Sharp increase in prices of raw materials; disappointing expansion of production capacity; resurgence of COVID-19 dampening demand.