1H22 results in line with our forecast

Wankai New Materials (Wankai) announced 1H22 results: Revenue climbed 104% YoY to Rmb9bn, and attributable net profit surged 188% YoY to Rmb542mn, close to the high end of the firm’s preannounced range (Rmb500–550mn) and in line with our forecasts. For 2Q22, revenue soared 132% YoY to Rmb4.5bn (largely flat QoQ) and attributable net profit quadrupled YoY to Rmb253mn (-14% QoQ).

Trends to watch

Alternative energy business to become a new bright spot. Wankai increased efforts to develop products with high added value and to explore markets. The firm’s sales of polyethylene terephthalate (PET) for photovoltaic back-sheet applications surged 109% YoY to around Rmb294mn in 1H22. Wankai believes PET for such applications is growing substantially and faces strong market demand. We expect the firm to focus on new energy and new materials. We think products with high added value may further enhance Wankai’s earnings.

Overseas exports volume to hit a new high. International energy prices have been rising since the Russia-Ukraine conflict started. According to Bloomberg, 1H22 Brent oil prices averaged US$108/bbl, up 41% YoY; Henry hub natural gas prices in the US rose 112% YoY to US$6 per mn BTU; and TTF natural gas prices in the Netherlands surged 320% YoY to US$32 per mn BTU. We believe rising international energy prices put large cost pressure on overseas bottle-grade PET producers. We think their capacity utilization rate may continue to decline. Under this circumstance, other countries or regions could be increasingly reliant on imports from China, in our view. We think Wankai’s export volume likely will grow at an accelerating pace and could hit a new high if international energy prices remain high in 2H22. We believe this could drive strong earnings growth.

We expect the bottle-grade PET market to remain buoyant and capacity expansion to drive earnings growth. According to SCI99.com, a set of bottle-grade PET facilities is slated to come online in China in 2022, implying 5% growth. We think supply conditions remain largely stable. We believe Chinese apparent consumption of bottle-grade PET may maintain about 1% growth, driven by accelerating replacement of traditional packaging materials and strong expansion in overseas demand. As such, we expect the bottle-grade PET market to remain buoyant in 2H22. Wankai’s annual production capacity is currently 2.4mn tonnes. The firm started construction of Phase 3 facilities in Chongqing (600kt). We expect its total capacity to reach 3mn tonnes in 2023, thus driving strong earnings growth.

Financials and valuation

We raise our 2022 and 2023 earnings forecasts 22% to Rmb1.2bn and 16% to Rmb1.5bn, as the business climate of the bottle-grade PET market may further improve. We lift our TP 22% to Rmb45 (implying 13x 2022e P/E and 10x 2023e P/E), with 28% upside. We maintain an OUTPERFORM rating. The stock is trading at 10x 2022e and 8x 2023e P/E.

Risks

Fluctuations in prices and supply of raw materials; intensifying market competition; high proportion of overseas revenue.