Orinko is a leading domestic player in the modified plastics industry, with downstream products covering home appliances, automobiles, communication electronics, photovoltaic (PV) energy storage, etc. Orinko has been continuously venturing into new areas leveraging its deep technical reserves, posting growth in both shipment and price on the back of organic growth and M&As. Recently, Orinko announced its entry into the lithium-ion battery (LIB) separator industry, planning to build eight wet process separator production lines. Orinko has established a solid cost advantage thanks to its self-developed production lines and domestically sourced raw materials. Its existing upstream and downstream reserves align closely with the separator industry, laying a foundation for making　　rapid breakthroughs. We are optimistic about the Company's long-term growth prospects and assign 24x 2024E PE to derive a target price of Rmb17. We initiate coverage with a "BUY" rating.

Constantly expanding into new fields, with the separator business poised to create a second growth curve.

Orinko is a leading player in the domestic modified plastics industry, and its products are widely used in household appliances, autos, communication electronics, new energy and other fields. Its main business is developing steadily, benefiting from the import substitution of modified materials, and it is continuously expanding into new energy vehicles (NEVs) and other high-margin segments. Orinko recently ventured into separators, which may warrant a second growth curve leveraging its cost and customer relation advantages. We expect the Company's legacy main business to benefit from import substitution + the ramp-up of high-tech businesses, while the separator business will bring new growth, thus driving the overall earnings to improve.

Modified plastics: A market worth Rmb300bn in 2025, with Orinko benefiting from import substitution + a diversified presence.

Modified plastics is an important intermediate of the petrochemical industry chain, widely used in fields with high material performance requirements. Presently, the global and domestic plastic modification rates have been growing steadily, but there is still a gap between China's plastic modification rate and the global level: According to Zhiyan Consultancy (Chyxx.com), a Beijing-based research consulting firm, the global/domestic plastic modification rate was 47.78%/ 21.78% in 2018, respectively, still presenting room for the rate to double in China. In addition, the domestic modified plastics market is mainly dominated by foreign suppliers for a long time, and the market share of domestic enterprises stood at just about 10% in 2021. We expect the import substitution of the domestic polymer materials industry will steadily advance across new energy, communication electronics and other sectors under the support of national policy. We expect that China's modified plastics market will be worth more than Rmb300bn in 2025. Orinko has high market competitiveness with deep polymer materials technology reserves and 6 self-developed core technology systems. Meanwhile, Orinko maintains long-term strategic cooperation with Midea Group to warrant stable　　downstream demand. We expect Orinko to embrace a rise in shipment and profit in 2023 under the three factors of falling raw material prices + sustained recovery in demand + expansion into high-/new-tech fields.

LIB separators: Advantages in raw materials + equipment + customers will help the Company's rapid development.

Driven by robust growth in electric cars and energy storage, global demand for LIB separators has continued to grow. We expect that the market will reach 53.9bn sqm by 2027, maintaining a CAGR of 30%+. The domestic separator industry has basically completed import substitution and is moving towards global replacement. Venturing into the separator industry, Orinko announced on the evening of Jun 26 that it intends to invest Rmb250mn to set up "Huitong New Energy" (会通新能源) by teaming up with "Wuhu Chuangtao Enterprise Management Partnership" (芜湖创韬) and construct eight production lines that will be completed next year and the year after. Thanks to self-developed production lines and domestically sourced raw materials, the investment in a single line is only ~Rmb120mn, highlighting the cost advantage. In addition, the downstream customers of its main business, modified materials, are highly relevant to separator customers, laying the foundation for the Company's rapid entry into the separator industry.

Potential risks:

Fluctuations in the downstream household appliances and automobile industry; price fluctuations of major raw materials; increasing competition in the industry; concentration of customers; loss of technical personnel or failing to supplement technical personnel in time; leakage of core technology or development falling behind schedule; expansion into separators missing expectations.

Earnings forecasts, valuation and ratings:

Considering that the new separator business may create a second growth curve, coupled with advantages in raw materials + equipment + customers that would warrant rapid market expansion, we expect that rapid capacity construction will inject new momentum into the Company's growth in the short term. As import substitution continues for modified plastics, Orinko will embrace a rise in shipment and profit alike, driven by falling raw material prices + sustained recovery in demand + expansion into high-/new-tech areas. We forecast 2023E-25E attributable net profit (ANP) of Rmb184mn/ 318mn/438mn, respectively. We take Pret Composites (002324.SZ) and Wote Advanced Materials (002886.SZ), whose valuation stands at 24x 2024E PE and 0.1x PEG based on Wind consensus estimates, as comparable companies for the modified plastics business. We take Energy New Material (002812.SZ), Senior Technology Material (300568.SZ), and Cangzhou Mingzhu Plastic (002108.SZ), whose valuation stands at 15x 2024E PE and 0.4x PEG based on Wind consensus estimates, as comparable companies for the LIB separator business. Considering the improving profitability of the Company's modified plastics business and prospects of the new separator business in promoting robust earnings growth, we assign 24x 2024E PE to derive a target price of Rmb17 and initiate coverage with a "BUY" rating.