Core views:

Shuangxing Color Plastic New Materials is a leading producer of biaxially-oriented polyethylene terephthalate (BOPET) films in China with a production capacity of more than 1mt in BOPET films. Given the strong momentum of its flagship products used in the optical, photovoltaic (PV) and information sectors, the contribution of its new material products to the gross profit has now exceeded 85%. Relying on scale & technological advantages, the Company has forayed into the polyethylene terephthalate (PET) composite copper foil segment-targeting the vast lithium battery collector market-with significant cost competitiveness, further expanding its headroom for growth. We forecast its 2022E/23E/24E attributable net profit (ANP) to be Rmb1,794mn/2,491mn/3,182mn, equivalent to EPS forecast of Rmb1.55/2.15/2.75, respectively. Based on the average valuation level of comparable companies, we assign a target price of Rmb30 (on 19x 2022E PE) and initiate coverage with a "BUY" rating.

Abstract:

A BOPET film leader venturing into new materials:

Shuangxing is a domestic BOPET film leader. Its breakthroughs in optical film enabled the increase in both volume and prices, driving a rapid rise in profitability in 2009. The Company's earnings continued to increase in 2021, sustaining high earnings with operating revenue at Rmb3.48bn (+32% YoY) and ANP at Rmb714mn (+18% YoY) in 1H22 against the backdrop of the price hikes of raw materials such as crude oil and purified terephthalic acid (PTA). We expect that with the decrease in crude oil prices, the pressure on the cost end would ease in 2H22. The proportions of the high-end new materials, such as optical and PV films, in the Company's gross profit are gradually increasing, likely at 85% and 93% in 2022-23 per our forecasts, respectively, implying the strengthened new material attributes of the Company.

Core optical and PV product capacity expansion:

The first phase of the Company's 200mn sqm optical film production capacity was completed at the end of 2021, and the second phase of 200kt production capacity was gradually put into operation in 1H22, further expanding its production capacity. The new capacity of enhanced PET substrates for PV and polyethylene terephthalate glycol (PETG) heat-shrinkable films will likely be commissioned in 2H22, which may further increase the Company's market share in high-end functional films. The capacity expansion of flagship products, a further shift in the overall capacity mix towards high-end products, and the rapid launch of new products are beneficiary to Shuangxing's core competitive position in the market.

New growth directions: Shuangxing targets the lithium collector market with PET composite copper foils.

Currently, PET composite copper foils gain massive market attention for being able to improve the safety and energy density of the lithium battery. With the improvement of product yield and the continuous iteration of equipment technology in the context of large-scale industrialization in the future, we expect that the manufacturing cost of composite copper foils can be reduced to less than Rmb3/sqm, presenting competitive advantages compared with the traditional copper foils. We predict the total addressable market (TAM) of PET composite copper foils nationwide will likely reach about Rmb29bn in 2025. Shuangxing, with the advantage of self-produced films, smooth production processes, close cooperation with equipment enterprises and the active promotion of R&D, is likely to become the core player of the composite copper foil industry with its cost at about Rmb3.5/sqm as we estimate.

Generous R&D spending and leading production capacity bode well for its solid leadership.

Shuangxing has been stepping up product R&D in the field of new materials, with R&D spending at Rmb125mn (+13% YoY) in 1H22. The Company has completed the production capacity of 10kt nano masterbatches, which is conducive to the improvement of products in new energy fields such as PV and lithium batteries. Its existing capacity of more than 1mt ranks first in the industry, showing significant scale advantages. With the continuous commissioning of the newly built capacity, the capacity of high-end new materials will be further improved. We believe that the Company will cement its leading position by virtue of its own R&D strength and scale advantages in capacity, leading us to feel upbeat about its future development.

Potential risks: Macroeconomic volatility; intensified industry competition; fluctuating raw material prices; slower-than-expected progress in incremental capacity construction; lower-than-expected utilization rate of new capacity; products not up to the requirements over technical parameters; the attrition of talents.

Investment recommendation: Shuangxing is a leading producer of BOPET films in China with a production capacity of more than 1mt in BOPET films. Given the strong momentum of its flagship products used in the optical, PV and information sectors, the contribution of its new material products to the gross profit has now exceeded 85%. Relying on scale and technological advantages, the Company has forayed into the PET composite copper foil segment-targeting the vast lithium battery collector market-with significant cost competitiveness, further expanding its headroom for growth. We forecast its 2022E/23E/24E ANP to be Rmb1,794mn/ 2,491mn/3,182mn, equivalent to EPS forecast of Rmb1.55/2.15/2.75, respectively. Considering the average valuation of 20x 2022E PE (based on Wind consensus estimates) for comparable companies, including Yuxing Film (300305.SZ), Solartron Technology (688299.SH), Sidike New Materials (300806.SZ), EM Technology (601208.SH) and Exciton Technology (300566.SZ), and based on PE, PEG and EV/EBITDA valuation methods, we assign a target price of Rmb30, corresponding to 19x 2022E PE, and initiate coverage with a "BUY" rating.