2021 results slightly beat our expectation

Dongfeng Printing announced its 2021 results: Revenue rose 24.0% YoY to Rmb3.81bn, attributable net profit grew 43.4% YoY to Rmb785mn, and recurring net profit increased 45.0% YoY to Rmb777mn thanks to high investment returns. Its results slightly beat our expectations.

Revenue at the firm grew 10.2%, 44.4%, 31.4%, and 18.2% YoY to Rmb971mn, Rmb891mn, Rmb851mn, and Rmb1.09bn in 1Q-4Q21. Its attributable net profit increased 33.1%, 208.9%, 16.1%, and 4.8% YoY to Rmb246mn, Rmb223mn, Rmb119mn, and Rmb197mn in the same periods.

Trends to watch

New businesses drive revenue growth. Revenue at Dongfeng Printing rose 24% YoY in 2021. 1) Cigarette packet business: Revenue rose 14.9% YoY to Rmb2.46bn in 2021, with sales volume at 3.32mn packets (+11.2% YoY). 2) New materials business: Revenue in this segment increased 37.0% YoY to Rmb300mn in 2021. The firm signed new clients in the alternative-fuel vehicle (AFV) battery and food packaging industries for its PET basic film, functional film, and high-barrier packaging film products. 3) Drug packaging business: Revenue from drug packaging services grew 92.3% YoY to Rmb540mn in 2021. Its revenue growth in this segment remains high after we exclude the impact of business consolidation. We attribute the encouraging results to the firm’s customer acquisition and efficient integration of its drug packaging business.

Improved expenses and high investment returns contribute to earnings growth. In 2021, the firm’s gross margin (GM) fell 5.4ppt YoY to 31.6% due to the intense competition in the cigarette packet market and raw material price hike. Specifically, GM of the cigarette packet business dropped 6.1ppt YoY to 27.3% in 2021. Dongfeng Printing’s expense ratio in 2021 dropped 2.3ppt YoY to 17.6%. In the same period, selling, G&A, financial, and R&D expense ratios slid 0.9ppt, 0.9ppt, 0.3ppt, and 0.2ppt YoY to 5.0%, 8.5%, 0.02%, and 4.1%. In 2021, the firm’s attributable net profit margin grew 2.8ppt YoY to 20.6% thanks to decline in expense ratio and high investment returns.

Upbeat on outlook of new materials, drug packaging, and e-cigarette businesses. 1) New materials business: The firm is proactively upgrading its film products to meet the demand of clients in the AFV battery, food packaging, energy-saving construction markets. It has established close relationships with Yunnan Energy New Material and Contemporary Amperex Technology thanks to its advanced products R&D. We are upbeat on its new materials business. 2) Drug packaging business: The size of this market stands at over Rmb100bn, but the market is relatively fragmented. Dongfeng Printing continues to optimize its business in this segment via organic development and M&A. It now provides one-stack drug packaging solutions to accelerate the growth of its drug packaging business. 3) E-cigarette business: China’s regulations on the e-cigarette industry are implemented and we think the industry will grow in a more sustainable manner. The firm has expanded its basic material, e-cigarette flavoring businesses, as well as production capacity. We think it will likely benefit from the standardized development of the industry.

Financials and valuation

As the firm’s revenue from new businesses and investment returns exceeded our expectations, we raise our 2022 and 2023 EPS forecasts 16% and 25% to Rmb0.53/sh and Rmb0.61/sh. The stock is trading at 13x 2022e and 11x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb10.0, implying 19x 2022e and 16x 2023e P/E with 45% upside.

Risks

Surging raw material prices; expansion of new business disappoints; changes in regulatory policies.