2024 and 1Q25 results in line with market expectations

Shandong Pharmaceutical Glass announced its 2024 and 1Q25 results: In 2024, revenue rose 3% YoY to Rmb5.1bn and attributable net profit grew 22% YoY to Rmb943mn. In 4Q24, revenue remained flat YoY at Rmb1.3bn and net profit rose 38% YoY to Rmb223mn. In 1Q25, revenue fell 2% YoY to Rmb1.24bn, and attributable net profit rose 1.3% YoY to Rmb224mn, in line with market expectations.

2024:

1) Revenue grew steadily; product mix improved: Revenue from core products molded bottles and brown bottles rose 4% and 3.5% YoY to Rmb2.35bn and Rmb1.16bn, of which we estimate sales volume of neutral borosilicate molded bottles at about 2bn units (vs. 1.4bn units in 2023). Revenue from ampoules, tube bottles, rubber stoppers, and aluminum caps rose -6%, 5%, 12%, and -1% YoY to around Rmb69mn, Rmb214mn, Rmb286mn, and Rmb56mn. By region, domestic and overseas revenue rose 0.5% and 8.3% YoY to Rmb3.59bn and Rmb1.47bn.

2) Gross margin rose steadily: Due to falling prices of soda ash and coal, gross margin rose 3.7ppt YoY to 32% (excluding tax and surcharges), with gross margin of molded bottles, brown bottles, and rubber stoppers rising 4.1ppt, 4.6ppt, and 11ppt YoY to 43%, 28%, and 35%.

3) Provision for excess incentive bonuses and G&A expense ratio rose: Selling, G&A, and R&D expenses rose -12%, 15%, and 10% YoY, resulting in YoY increase of selling, G&A and R&D expense ratios by -0.4ppt, 0.4ppt, and 0.2ppt YoY.

4) Strong cash flow: Net operating cash flow rose 11% YoY to Rmb1.17bn; cash-to-revenue ratio rose 4.6ppt YoY to 99%.

5) Excellent financials: Net cash on hand and wealth management products reached Rmb2.8bn at end-2024. The firm proposes to pay dividend of Rmb0.62/sh, implying a payout ratio of 43.6% and a dividend yield of 2.8%.

1Q25

1) Revenue from neutral borosilicon slowed slightly: Revenue fell 2% YoY. We estimate that sales volume of neutral borosilicate molded bottles fell slightly YoY (mainly due to a high base in 1Q), and products such as brown bottles were also under pressure.

2) Gross margin slightly decreased: Gross margin fell 0.4ppt YoY to 30.2%.

3) Expenses declined: Selling and G&A expenses fell 28% and 26% YoY.

4) Net margin remained high: Net margin rose 0.6ppt YoY to 18%.

Trends to watch

Growth of neutral borosilicon molded bottles slowed; falling prices of raw materials boosted gross profit. We think sales volume of neutral borosilicate molded bottles slowed slightly in 1Q25 due to the slack season. However, we expect the 10th batch of centralized procurement to boost sales volume. In addition, falling prices of raw materials (i.e., soda ash and coal) will continue to boost gross profit in 2025.

Financials and valuation

As we cut our forecast for the growth rate of borosilicate molded bottles, we lower our earnings forecast by 17% to Rmb1.02bn for 2025 and introduce earnings forecast at Rmb1.1bn for 2026. The stock is trading at 14.5x and 13.5x 2025e and 2026e P/E. Given rising risk appetite, we maintain an OUTPERFORM rating and TP of Rmb30.5, implying 20x 2025e and 18.4x 2026e P/E and offering 37% upside.

Risks

Slower-than-expected ramp-up of neutral borosilicon; intensifying competition; sharper-than-expected fluctuations in raw material prices.