3Q24 results miss our expectations

Shandong Pharmaceutical Glass announced its 1-3Q24 and 3Q24 results. In 1-3Q24, revenue rose 4% YoY to Rmb3.8bn and net profit grew 17% YoY to Rmb720mn. In 3Q24, the firm's revenue fell 1% YoY to Rmb1.24bn and net profit rose 7% to Rmb245mn, missing our and market expectations due to lower-than-expected gross margin.

Quarterly fluctuations of borosilicate business increased; foreign trade business was affected by FX rate. In 3Q24, revenue fell 6% QoQ, mainly due to frequent overhauls at pharmaceutical companies in 3Q24 and a slight delay in centralized procurement. As a result, pharmaceutical companies' purchases of molded bottles in neutral borosilicate glass declined (we estimate the QoQ decline at 100mn units). In addition, renminbi appreciation weighed on the export prices of the firm's brown bottles and bottles for cosmetics (exports accounted for about 35% of its main revenue), weighing on revenue and gross margin of the export segment.

Gross margin fell QoQ. In 3Q24, gross margin fell 2.5ppt QoQ to 31.6%, mainly due to a QoQ decline in sales volume of borosilicate products and pressure on gross margin of foreign trade business caused by fluctuating exchange rates.

Expense ratio increased slightly. In 3Q24, the firm’s overall expense ratio rose 0.6ppt YoY to 8.7%. Its selling, G&A, financial, and R&D expenses changed -20%, 1%, 73%, and 22% YoY, and selling, G&A, financial, and R&D expense ratios changed -0.6, 0.1, 0.3, and 0.6ppt YoY.

Net margin increased. The firm's operating profit margin rose 1.3ppt YoY to 23.4% (stayed unchanged QoQ) and net margin rose 1.5ppt YoY to 19.8% (+0.5ppt QoQ), thanks to lower asset impairment losses in 3Q24.

Cash flow remained strong. In 3Q24, the cash-to-revenue ratio was 102% (vs. 93% in 3Q23) and the net profit-to-cash ratio was 91% (vs. 136% in 3Q23), as inventory increased Rmb125mn QoQ in 3Q24.

Liability-to-asset ratio stood at 22% in 3Q24, and net cash on hand was Rmb2.8bn.

Trends to watch

Borosilicate molded bottle business saw seasonal disruptions; long- term penetration rate to rise. As the tenth round of centralized procurement has not been completed and pharmaceutical companies entered maintenance in 3Q24, sales volume of the firm's borosilicate molded bottles was more volatile. With the gradual implementation of centralized procurement, the firm's furnaces that were put into operation in the early stage will gradually contribute incremental earnings, boosting its profit. In the long term, the penetration rate of borosilicate molded bottles still has about 20% upside potential, which may bolster the firm’s solid growth in the medium and long term.

Financials and valuation

We keep our 2024 and 2025 net profit forecasts unchanged at Rmb977mn and Rmb1.23bn, and the stock is trading at 18x and 14x 2024e and 2025e P/E. We maintain an OUTPERFORM rating and our TP of Rmb30.5, implying 20.7x and 16.5x 2024e and 2025e P/E and offering 15% upside.

Risks

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