Company Profile

China Hainan Rubber Industry Group Co. specializes in producing and processing natural rubber. Thegroup's products include primarily latex threads and gloves, natural rubber latex concentrated as wellas glues. (Source: Reuters)

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Thanks to rising prices of rubber, China Hainan Rubber Industry Group (the company) is expected toturn losses into profits.

The global output of natural rubber declined due to bad weather and labor shortage incurred by theCOVID-19 pandemic. With the economic activities recovering worldwide, the demand continued toimprove. The supply and demand dynamics pushed rubber prices up, with the index gaining 20% inOctober. As a leading player of rubber industry, the company, with the largest planting areas, isexpected to take the lead in benefiting from it.

The strategy of technological innovation and “going global” helps improve its comprehensivecompetitiveness.

The Hainan-based company put the first automatic processing line of latex into operation in China,thanks to its technological innovation. It is also the first enterprise to get the certificate ofGJB9001C-2017, holding a safe lead in the industry.

In the meanwhile, the company made an acquisition of RI International, the largest rubber trader onthe globe, improving its business presence along the industrial chain of natural rubber, strengtheningits international business capabilities, and further enhancing its power and position in the industry.

The conventional business and modern agriculture drove its development.

1) Rubber business expansion: the company’s revenue mainly came from sales of preliminaryprocessing products years ago and it was faced with fierce competition. In recent years, it changed itsdevelopment pattern, updating planting items in special plantations, and actively promoted naturalrubber products to shift from low-end products to high-end ones.

2) The modern agriculture helps it consolidate its anti-risk capabilities. The company made full use ofcollagen with low yield to develop high-efficient agriculture, leisure agriculture and combinedindustry of agriculture and tourism to cushion the blow of rubber cycle.

Earnings forecast and investment recommendationWith the rising prices of natural rubber, the company’s performance may step into upward region, asits main revenue is from preliminary processing products of natural rubber. Meanwhile, theestablishment of modern and high-efficient agricultural projects also helps it improve itssustainability.

We estimate its EPS to be CNY 0.02/ CNY 0.04/ CNY 0.08 for 2020/2021/2022 for 2020/2021/2022,implying a P/E ratio to be 256.7X/137.2X/ 58.5X, based on the closing price on December 15th. Wegive it an “Outperform” rating with the first coverage.

Potential risks

natural disasters; prices fluctuations of natural rubber; less-than-expected profits of modernagriculture

This English translation of the original Chinese version <橡胶价格触底反弹，龙头有望率先受益>

issued by Industrial Securities on December 16, 2020 is for information purpose only. In case of adiscrepancy, the Chinese original will prevail.