1H22 results miss our expectations

Dongfeng Printing announced its 1H22 results: Revenue grew 5.6% YoY to Rmb1.97bn, attributable net profit fell 48.6% YoY to Rmb241mn, and recurring attributable net profit dropped 49.2% YoY to Rmb234mn, missing our expectations on a sharp decline in investment income.

Revenue increased 7.8% YoY in 1Q22 to Rmb1.05bn and 3.2% YoY in 2Q22 to Rmb919mn. Attributable net profit fell 50.7% YoY in 1Q22 to Rmb121mn and 46.3% YoY in 2Q22 to Rmb120mn.

Trends to watch

Revenue maintained steady growth. The firm’s revenue rose 5.6% YoY in 1H22. By segment, revenue from the cigarette packaging business increased 9.65% YoY to Rmb1.35bn, with sales volume rising 6.03% YoY to 1.76mn boxes. Revenue from the drug packaging business grew 7.2% YoY to Rmb278mn. The firm’s cooperation with Buchang Pharmaceuticals and Astrazeneca progressed smoothly in 1H22, with customer structure continuing to improve. Revenue from new materials was Rmb137mn in 1H22. The firm maintained steady growth amid volatile demand caused by COVID-19 headwinds.

Decrease in investment income led to declining profitability. Gross margin fell 1.8ppt YoY to 31.75% in 1H22, which we attribute to the adjustment of the firm’s business structure and lower capacity utilization ratio caused by COVID-19. Expense ratio fell 2.0ppt YoY to 14.75% in 1H22. Specifically, selling, G&A, and financial expense ratios declined 0.7ppt, 1.0ppt, and 0.6ppt YoY to 3.81%, 6.95%, and 0.44%. R&D expense grew 0.3ppt YoY to 4.43%. Investment income fell 117% YoY to -Rmb48mn in 1H22. As the yield of consumer investment funds declined, the firm’s attributable net margin dropped 12.9ppt YoY to 12.27%. Excluding the impact of investment losses, attributable net margin would have risen 5.2ppt YoY in 1H22.

Upbeat on growth potential of the new material and drug packaging businesses; suggest watching changes in investment income over the short term. 1) New materials: Dongfeng Printing has extensive experience in the new materials industry. It has continued to explore new application fields such as food packaging and energy-saving materials for buildings. As the firm continues to expand its product portfolio and customer base, we believe its new material business has large growth potential. 2) Drug packaging: The firm has stepped up efforts to expand its presence in drug packaging through M&A deals. With a diversified product portfolio, the firm has gained many well-known clients such as Sinovac, Yuanda Biology, and Sinopharm. We suggest watching changes in the firm’s investment income over the short term.

Financials and valuation

Concerning the decline in the firm’s investment income and the coming of withdrawal period of consumer investment funds, we lower our 2022 and 2023 attributable net profit forecasts 36.0% and 27.2% to Rmb524mn and Rmb679mn, implying EPS of Rmb0.28 and Rmb0.37. The stock is trading at 16x 2022e and 12x 2023e P/E. Considering our earnings forecast revisions and the impact of tightening regulatory policies for new tobacco products, we maintain OUTPERFORM but cut our TP 40% to Rmb6 (21x 2022e and 16x 2023e P/E), offering 32% upside.

Risks

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