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Recently, Shanghai Tianyang Hot Melt Adhesives (Shanghai Tianyang) announced its private placement application has been received by the China Securities Regulatory Commission (CSRC). We expect if it is to be approved by CSRC, it will bolster the expansion of the firm’s photovoltaic (PV) adhesive film and hot-melt wall cloth capacity and contribute incremental earnings. Shanghai Tianyang has extensive experience in the hot-melt adhesive industry, and enjoys visible competitive advantages in technology, product, operations and management. We believe the firm may continue to acquire more clients and expand its distribution network backed by capacity expansion. We expect the firm to ride the boom in the PV adhesive film and wall cloth industries, driving rapid growth in earnings. We reiterate Shanghai Tianyang as our top pick.

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The firm’s PV adhesive film capacity expanding rapidly, backed by its advantages in product and technology; booming demand to bolster growth in the next three years. Since 2011, Shanghai Tianyang has expanded into the PV adhesive film market. Backed by its stable and efficient production system and strong technological capability, the firm’s PV adhesive films have outperformed those of its peers and have been widely recognized by downstream clients such as CHINT and Risen Energy. According to National Bureau of Statistics (NBS), PV installations in China grew 137.4% YoY to 30.88GW, and exports of PV modules rose 74.3% YoY to 78.6GW in 6M22. We believe downstream domestic and overseas demand for PV adhesive films may continue to remain strong. In 1H22, revenue from the firm’s PV adhesive film business surged 250% YoY. We expect its shipments of PV adhesive film to grow notably HoH in 2H22, driven by rapid capacity expansion. We also expect the firm’s PV adhesive business to lead that of its peers on the back of capacity expansion from 0.1bn sqm/yr in 1H22 to 0.51bn sqm/yr in 2024 funded by its private placement. We are upbeat on the firm’s prospects for rapid growth in the next three years.

Wall cloth business rising rapidly; hot-melt adhesive and electronic adhesive businesses continues to expand. Shanghai Tianyang’s self-developed four-layer hot-melt web for seamless wall cloth enjoys a clear advantage as it addresses multiple pain points for consumers amid consumption upgrade and the rise of health awareness. In 1H22, the firm’s revenue from wall cloth business recorded 30% YoY growth despite resurgence of COVID-19. We expect Shanghai Tianyang to continue upgrading its wall cloth products and expand distribution channels, fueling rapid growth of its proprietary brand “Tianyang Wall Cloth”. Regarding its hot-melt adhesive business, the firm has maintained long-standing collaborations with high-end clients in the textile and apparel industry, and the global top three suppliers for garment lining. For its electronic adhesive business, Shanghai Tianyang has also entered into partnerships with several leading companies in industries such as intelligent wearables, renewable energy and consumer electronics.

Upbeat on the hot-melt adhesive leader, Shanghai Tianyang is entering a fast-growth track driven by businesses of PV adhesive films and wall cloths. According to the projections of Solarzoom, the supply of polysilicon may start to increase QoQ in August. We believe rising polysilicon supply may bring down its price, further pushing up downstream demand for PV modules and driving marginal improvement in capacity utilization rate along the PV value chain. We expect the firm’s PV adhesive film business to grow rapidly on capacity expansion, meeting the booming demand from the PV industry. The firm’s period expense ratio fell approximately 8% YoY in 1H22. We believe this indicates the firm’s efforts to improve its management efficiency, reduce cost and increase efficiency is gradually pay off.

Financials and valuation

We keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 46x 2022e and 20x 2023e P/E. Considering the firm’s capacity expansion of PV adhesive film and hot-melt wall cloth businesses and their promising growth prospects, we raise our TP 29% to Rmb18, implying 25x 2023e P/E with 25% upside. We maintain an OUTPERFORM rating.

Risks

Negative surprises in end-market demand; lower-than-expected new capacity; raw material price volatility; cash flow risk.