1Q22 results in line with our expectations

Dongfeng Printing announced its 1Q22 results: Revenue rose 7.8% YoY to Rmb1.05bn, net profit attributable to shareholders dropped 50.7% YoY to Rmb121mn, and recurring net profit attributable to shareholders fell 51.9% YoY to Rmb117mn. Net profit declined markedly, due to lower investment income. Operating net profit attributable to shareholders rose about 12% YoY. Its 1Q22 results are in line with our expectations.

Trends to watch

Revenue continued to increase steadily. The firm's revenue rose 7.8% YoY in 1Q22, despite the COVID-19 resurgence in a handful of regions in China. Dongfeng Printing follows a transformation strategy of increasing cigarette packaging products, expanding drug packaging categories, entering new market segments, and raising valuation. We think that in 1Q22, its cigarette packaging business grew steadily, new material and e-cigarette business maintained solid growth momentum, and its business structure continued to improve. In 1Q22, the COVID-19 resurgence in east China had a negative impact on the firm's factories in this region. However, we think that related businesses may recover rapidly after the impact of the pandemic eases.

Profitability weakened on lower investment income. The firm's gross margin (GM) dropped 1.7ppt YoY to 32.2% in 1Q22. We attribute the lower GM to: 1) changes in the firm's business structure and 2) the lower manufacturing facility utilization rate in some factories amid the COVID-19 resurgence in east China. The firm's period expense ratio fell 1.0ppt YoY to 13.36% in 1Q22. Specifically, selling, G&A, and R&D expense ratios dropped 0.6ppt, 0.4ppt, and 0.2ppt YoY, but financial expense ratio edged up 0.1ppt YoY. In 1Q22, the firm's attributable net profit margin dropped 13.7ppt YoY to 11.58%, as: 1) the firm received relatively high investment income in 1Q21; and 2) the yield of consumer investment funds fluctuated in 1Q22. Excluding the yield of consumer investment funds, we estimate that the firm's attributable net profit margin rose 3.2ppt YoY.

We are upbeat on the firm's drug packaging and new material businesses. In addition to the cigarette packaging business, the company also operates drug packaging, new material, and e-cigarette businesses.

Drug packaging: According to data from qianzhan.com, the size of China's drug packaging industry exceeded Rmb100bn in 2020. However, the concentration ratio of the industry remained low. We think that leading companies with effective quality assurance and advanced design and R&D capabilities may rapidly gain market share under the associated inspection and assessment system. Dongfeng Printing has a well-built drug packaging business segment, offering a variety of drug packaging solutions. We are upbeat on the growth potential of this business.

New materials: Dongfeng Printing has extensive experience in new material technologies. Its functional film products have been utilized in food packaging, new energy-enabled batteries, construction, and other industries. The firm has won multiple large customers such as Yunnan Energy New Material and CATL. We expect the new material business to become a new earnings growth engine going forward.

Financials and valuation

We keep our 2022 and 2023 earnings forecasts largely unchanged. The stock is trading at 13x 2022e and 11x 2023e P/E. We maintain an OUTPERFORM rating and a target price of Rmb10. Our TP implies 19x 2022e and 17x 2023e P/E, offering 46% upside.

Risks

Surging raw material prices; policy headwinds; disappointing expansion of new businesses.