1H24 results largely in line with our expectation

Shandong Pharmaceutical Glass announced its 1H24 results: Revenue rose 6.75% YoY to Rmb2.59bn and net profit grew 23% YoY to Rmb475mn, largely in line with our and market expectations.

In 2Q24, revenue rose 11% YoY to Rmb1.32bn and net profit grew 16% YoY to Rmb254mn.

1) Revenue growing steadily; product mix improving: In 1Q24 and 2Q24, revenue rose 2.5% and 11% YoY. We estimate that sales volume of borosilicate molded bottles stayed flat QoQ in 1Q24 and 2Q24. In January and April, revenue from molded and brown bottles accelerated, and the proportion of high-margin products increased.

2) GM continued to improve: In 1H24, GM rose 5.4ppt YoY to 32.35%, (up 3.5ppt QoQ and 3.7ppt YoY to 31% in 2Q24). We attribute the QoQ improvement in GM to rising proportion of high-margin products and falling cost of raw materials (i.e., soda ash, natural gas and coal).

3) Expenses remained stable and net margin rose: In 2Q24, selling, G&A, and R&D expenses fell 8%, 33%, and 19% YoY, driving the 2Q24 selling, G&A, and R&D expense ratio down 0.5ppt, up 0.6ppt, and up 0.2ppt YoY. The increase in G&A expenses was mainly due to employee incentive payments. In 2Q24, net margin rose 0.8ppt YoY to 19.3%, the highest level in recent years.

4) Strong cash flow: In 1H24, net operating cash flow rose 42% YoY to Rmb589mn, with the cash-to-revenue ratio rising 12ppt YoY to 100.7% in 1H24. Net cash ratio was 124% in 1H24.

5) Excellent financial position: As of end-1H24, the firm had no interest-bearing liabilities and had net cash on hand of nearly Rmb3bn, contributing about Rmb33mn of wealth management and interest income in 1H24.

6) Dividend payout ratio has reached a high level: The firm started to pay an interim dividend for the first time with a dividend of Rmb0.3/sh (implying an interim dividend yield of 1.4% and a payout ratio of　42%)1. If the dividend payout ratio is maintained at 42% in 2024, the dividend yield will reach 2.85%.

Trends to watch

Sales volume of core products continues to increase in 2H24; raw material prices also trend downward. We note that the firm started three new furnaces in 1H24, according to corporate filings. As the ninth batch of centralized procurement continues2, we expect borosilicate molded bottles to maintain high HoH growth in 2H24, and cosmetics products and brown bottle products to maintain double-digit growth. Meanwhile, prices of raw materials such as soda ash and coal have been weakening recently, which may also support earnings. We are optimistic that earnings will continue to grow rapidly amid the boom in borosilicate molded bottles. The valuation has reached a historical low, offering good investment value.

Financials and valuation

Given falling revenue growth and rising G&A expenses, we lower our 2024 earnings forecast 4.5% to Rmb977mn and leave our 2025 earnings forecast unchanged at Rmb1.23bn. The stock is trading at 14.8x 2024e and 11.8x 2025e P/E. We maintain an OUTPERFORM rating, but cut our TP 18% to Rmb30.5 given the low risk appetite, implying 20.7x 2024e and 16.5x 2025e P/E offering 40% upside.

Risks

Intensifying market competition; sharper-than-expected fluctuations in raw material prices; disappointing ramp-up of borosilicate molded bottles.