Investment positives

We initiate coverage on Zijiang Enterprise Group (Zijiang Enterprise) with an OUTPERFORM rating and a target price of Rmb8.24. Based on the SOTP valuation method, we think its APF business implies 25x 2023e P/E and its packaging business implies 14x 2023e P/E.

Why an OUTPERFORM rating?

Packaging solution provider has applied APF to LIBs. Zijiang Enterprise is engaged in manufacturing of polyethylene terephthalate (PET) preforms and bottles, color packaging and printing, and labels, and is a leading packaging solution provider in China. It started in the aluminum plastic film (APF) business in 2004 and successfully applied APF to lithium-ion batteries (LIB) in recent years. We think its main packaging business is growing rapidly.

Packaging market large; Zijiang Enterprise continues to expand businesses and acquire new clients on economies of scale and manufacturing advantages. The size of the domestic packaging market is approaching Rmb1trn, due to stable demand from delivery and non-alcoholic beverages industries. The market is relatively fragmented, but the market share of leading firms is increasing at present due to stringent environmental protection regulations and diversifying demand. In 2021, packaging revenue at Zijiang Enterprise was Rmb6.36bn. We think the firm has strong economies of scale. Zijiang Enterprise continues to enhance cooperation with established companies such as Dongpeng, Haitian, and Mengniu. In addition, it has entered the supply chains of new clients such as Yuanqi Senlin and Hey Tea. The firm is developing new businesses such as paper cups and medication packets. We expect its packaging business to maintain stable growth moving forward.

Domestic APF industry to rise; Zijiang Enterprise to benefit from its technological advantages and strong business presence in clients’ supply chains; to expand capacity. APF is an electrolyte, is corrosion-, penetration-, and heat-resistant, and has mechanical strengths. Therefore, it is used as a packaging material for soft pack LIBs. In 2020, the size of APF industry in China was Rmb4.1bn, implying a CAGR of 22.5% over 2016-2020. We expect domestic APF demand to grow rapidly as the penetration rate of soft pack batteries increases and supportive policies are implemented. At present, foreign-funded firms are major participants in the APF market. However, we note domestic firms are developing rapidly on the back of cost advantages. Zijiang Enterprise entered the APF market in 2004. In 2020, its APF products were applied to both consumer electronics and soft pack batteries of electric vehicles (EV). In 2021, its revenue from the APF business reached Rmb370mn, with a CAGR of 28% over 2017-2021. Its subsidiary Shanghai Zijiang New Material has been recognized by the Ministry of Industry and Information Technology (MIIT) as a small but innovative company and has developed a close relationship with BYD. At end-2021, Zijiang Enterprise’s APF capacity reached 36.6mn sqm, outperforming most peers. We expect its new capacity expansion projects to gradually come online and to bolster the growth of its APF business.

How do we differ from the market? We think the market has underestimated the growth momentum of the domestic APF industry and Zijiang Enterprise’s capacity and technological advantages in the industry.

Potential catalysts: New capacity comes on stream; demand from major clients soars; prices of raw materials drop.

Financials and valuation

We estimate the firm’s 2022 and 2023 EPS at Rmb0.35 and Rmb0.50, implying a CAGR of 16.9%. The stock is trading at 12x 2023e P/E. We expect the firm’s APF business to grow rapidly, benefiting from the expansion of the domestic APF market. We initiate coverage on Zijiang Enterprise with an OUTPERFORM rating and a target price of Rmb8.24. We think its APF business implies 25x 2023e P/E, while its packaging business implies 14x 2023e P/E. Our target price implies 35% upside.

Risks

Volatile raw material prices; disappointing capacity expansion and/or new client acquisition.