2021 and 1Q22 results in line with our expectation

Oxiranchem announced its 2021 and 1Q22 results. In 2021, revenue rose 17.7% YoY to Rmb6.72bn, and net profit attributable to shareholders declined 12.5% YoY to Rmb352mn, implying EPS of Rmb0.52, in line with market expectation. In 4Q21, revenue and net profit attributable to shareholders equaled Rmb1.73bn and Rmb159mn.

In 1Q22, revenue dropped 3.1% YoY to Rmb1.34bn, and net profit attributable to shareholders advanced 95.1% YoY to Rmb100mn, implying EPS of Rmb0.15, in line with market expectation. We think the significant increase in net profit was mainly attributable to earnings improvement of its main products. The company’s gross margin (GM) gained 2.26ppt YoY in 1Q22. In addition, its investment income increased Rmb24.54mn YoY.

Trends to watch

Construction chemicals business maintained sound growth. As a leading company in the domestic polyether monomer market, Oxiranchem holds a market share of around 40%. Its polyether monomer products are widely used in domestic high-speed railway, highway, subway, and other infrastructure construction projects. The company has production capacity of 850,000t/year, including a 300,000t project under construction, due to the capacity expansion project in Wuhan and a project in Yangpu (Hainan province).

Focusing on new energy materials. Gaogong Industry Institute (GGII) data shows that driven by increasing power battery shipments, China's electrolyte shipments reached 500,000t in 2021, up 100% YoY. The industry is in rapid development, in our view. Oxiranchem's new energy material products mainly include ethylene carbonate (EC) and dimethyl carbonate (DMC), among others, with total capacity of 26,000t in 2021 and a capacity utilization rate of 107%. We believe this indicates that demand is exceeding supply.

The healthcare business continues to gain momentum. Oxiranphex is the main healthcare platform of the company, and it mainly produces high-purity polyethylene glycol. Oxiranphex produces about 10,000t of polyethylene glycol annually, with output of 5,500t in 2021. Oxiranchem has also built an 8,000t/year granulating workshop that meets EU good manufacturing practice (GMP) standards. Currently, the company has a 2,800t/year food and pharmaceutical-grade polysorbate project under construction. In addition to existing products, we expect Oxiranphex to expand into higher-value-added active pharmaceutical ingredients (APIs) and injection excipients and, in the long term, into the high-end polyethylene glycol (PEG) derivatives market.

Financials and valuation

Given COVID-19 resurgence and slowdown in growth of infrastructure construction and real estate markets, we lower our 2022 earnings forecast 32% to Rmb434mn and introduce our 2023 earnings forecast of Rmb526mn. The stock is trading at 15x 2022e P/E and 13x 2023e P/E. Considering that we have lowered our earnings forecasts and the company’s growth will likely remain rapid in the next two years, we cut our TP 12% to Rmb11, implying 17x 2022e and 14x 2023e P/E with 14% upside. We maintain an OUTPERFORM rating.

Risks

Economic growth slows; mid- or long-term growth faces uncertainties; environmental protection and safety issues lead to operating risk.