Earnings alert shows that 1H22 recurring attributable net profit rose 36-50% YoY

Shanghai Tianyang Hot Melt Adhesives (Shanghai Tianyang) preannounced its 1H22 results, estimating revenue rose about 51% YoY to Rmb676mn, and recurring attributable net profit increased 36-50% YoY to Rmb20-22mn. Accordingly, in 2Q22, revenue grew about 61% YoY to Rmb357mn, and recurring attributable net profit totaled Rmb20.57-22.57mn, turning profitable QoQ and YoY. The results were in line with our expectations.

We expect Shanghai Tianyang, as a leading hot melt adhesive company, to sustain its high growth from 2H22 with continuous growth in the production capacity of photovoltaic (PV) adhesive films and large client acquisition. We think that the firm will grow rapidly in the medium and long term driven by multiple businesses, including PV adhesive films and wall cloths.

Trends to watch

PV adhesive films and hot-melt wall cloths maintained rapid growth, driving fast revenue growth in 2Q22. In 1H22, revenue from PV adhesive film business grew about 250% YoY, and hot-melt wall cloths, 30%. In 2Q22, revenue from these two businesses grew rapidly by about 375% and 16% YoY. 1) PV adhesive films: The rapid growth in downstream PV installation continues. According to the National Energy Administration in China, the country’s installed PV capacity grew 139% YoY to 23.71GW in January-May 2022, suggesting strong demand. Prices of raw materials such as the ethylene vinyl acetate (EVA) particles remained high. In 2Q22, EVA films' average delivery price once hit Rmb17.5 per sqm, increasing about 58% from the lowest in 2Q21. Against this backdrop, the firm raised its delivery prices. Shanghai Tianyang also obtained more high-quality clients. We expect the firm to continue improving its capacity utilization and shipment volume. 2) Wall cloths: The company's wall cloth production capacity increased steadily. We believe that with the expanding channels, and increasing distributors, wall cloth shipment may improve, driving revenue growth.

Effective cost control and efficiency improvement; recurring net profit turned positive YoY in 2Q22. In 2Q22, the gross margin (GM) rose around 5ppt QoQ as 1) the firm continued to optimize its cost control, and 2) delivery prices of PV films and other businesses increased. Due to the firm’s improved management efficiency, its period expenses fell approximately 5ppt YoY, and period expense ratio dropped 8ppt YoY. As the disposal of fixed assets in 2Q21 generated about Rmb55mn non-recurring gains, the high base formed in 2Q21 has put pressure on YoY net profit growth in 2Q22. We expect the median of recurring net profit to be around Rmb21.57mn in 2Q22, turning positive YoY. The recurring net margin would then be around 6%, suggesting significant improvement.

We expect Shanghai Tianyang, as a leading hot melt adhesive company, to enter a period of rapid growth driven by businesses including PV adhesive films and wall cloths. We expect the firm to sustain its high growth in 2H22 with continuous capacity growth, booming orders, and declines in raw material prices. The strong growth potential of PV adhesive films may remain in 2H22. Wall cloths and electronic glue will likely maintain rapid growth due to the expansion of capacity, channels, and client bases.

Financials and valuation

We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 37x 2022e and 16x 2023e P/E. Given the promising businesses such as PV, we raise our TP by 9% to Rmb14 (44x 2022e and 19x 2023e P/E), offering 20% upside.

Risks

Disappointing end-market demand; new capacity lower-than-expected; raw material price volatility; cash flow risks.