Investment positives

We initiate our coverage of Wankai New Materials (Wankai) with an OUTPERFORM rating and a target price of Rmb37.00, implying 16x 2022e and 13x 2023e P/E.

Why OUTPERFORM rating?

Downstream applications of bottle-grade PET are growing rapidly and expanding. Bottle-grade polyethylene terephthalate (PET) is mainly used in traditional packaging fields (e.g. soft drinks and oil product packaging) and newer fields, including medical masks, fresh foods packaging in e-commerce, and daily chemicals. According to CCF and CCFEI (industry websites), bottle-grade PET’s global apparent consumption totaled around 32.08mnt in 2021, with China contributing around 7.05mnt (22%). The global apparent consumption volume of bottle-grade PET grew with a CAGR of around 7.5% during the 13th Five-Year Plan (FYP) period (2016-2020). It increased with an 8.1% CAGR in China in the same period, and growth is accelerating. We expect steady growth in bottle-grade PET demand in traditional fields and rapid growth in new fields.

Demand for bottle-grade PET will likely rise; sector capacity utilization ratio in an uptrend. According to chem99.com, one new PET production facility will come online in 2022 (Wankai’s facility) and in 2023 (Sanfame’s facility). We thus expect supply to remain stable. Downstream demand will likely grow with a CAGR of 10% in 2022-2023, driven by accelerated replacement of traditional packaging materials and expansion into new fields. We also expect the net export volume of bottle-grade PET to rise in 2022-2023, following global destocking in 2021. Due to strong demand, the industry’s capacity utilization ratio will likely rise to 86% in 2023 from 80% in 2021.

Wankai’s dual-base presence provides geographical advantage; its large capacity could unlock growth potential. We are upbeat about the firm’s earnings and expect its attributable net profit to increase to Rmb1.02bn in 2023 from Rmb442mn in 2021, with a CAGR of 52.3%. There are two reasons for this. First, we believe Wankai has a cost advantage. The cost of its bottle-grade PET produced at its Chongqing base is Rmb116/t lower than that of its Zhejiang base. Second, its bottle-grade PET capacity is increasing rapidly and reached 2.40mnt/yr in January, ranking No.2 in China. In 2022 and 2023, we expect capacity to grow 54% and 76% from the 2020 level.

How do we differ from the market? We expect bottle-grade PET demand to rise during the 14th FYP period. We believe the firm has good growth potential given its capacity expansion and lower costs from the dual-base model.

Potential catalysts: Bottle-grade PET sales volume grows rapidly; costs of Chongqing base’s products fall further.

Financials and valuation

We estimate 2022 and 2023 EPS at Rmb2.31 and Rmb2.96, with a CAGR of 52%. The stock is trading at 13x 2022e and 10x 2023e P/E. Demand for bottle-grade PET, the firm’s main product, is rising. We expect its earnings to grow steadily with capacity expansion. We initiate our coverage with an OUTPERFORM rating and a TP of Rmb37.0 (16x 2022e and 13x 2023e P/E) based on relative valuation, offering 22% upside.

Risks

New capacity disappoints; fluctuations in raw material prices and supply; intensifying competition; high overseas revenue.