Youngsun Intelligent Equipment has been focusing on the field of packaging equipment for more than two decades and has now stood out as a leading vendor in China’s packaging equipment sector. Relying on solid underlying core technologies and a complete product system, the Company is gradually expanding its business to aseptic canning production lines for beverages and room temperature milk, spearheading import substitution and localization of high-end packaging equipment. We are optimistic about Youngsun’s long-term growth potential and initiate coverage with a “BUY” rating.
Company profile: A leading packaging equipment vendor with continuous revenue growth in the past ten years.
1） Market position: Established in 2002, the Company focused on the field of packaging equipment and materials. Through the development strategy of combining organic development and mergers and acquisitions （M&As）， it has continuously enriched its product lines and presence buildup in subdivided fields, and its market share has continued to increase, making it a leading package equipment vendor; 2） Operating performance: The Company achieved operating revenue of Rmb2.75bn in 2022, with a 16.5% CAGR in 2011-22 and attributable net profit （ANP） of Rmb270mn with a 16.7% CAGR in 2011-22. The Company achieved gross profit margin （GPM） of 32.6%/32.1%/29.7%, respectively, and the net profit margin （NPM） was 8.5%/9.6%/9.9%, respectively.
Industry outlook: The market scale is growing steadily with a large potential for import substitution.
1） Industry overview: The upstream of packaging equipment consists of industries such as steel, mechanical components, electrical components, etc, and the downstream application fields are extensive, including food and beverage, medicine, petrochemical, chemical, printing, etc. Both upstream suppliers and downstream customers are relatively scattered. In recent years, the continuous increase in demand for cost reduction and efficiency increase in downstream industries is the core driving force for intelligent packaging equipment. 2） Market room: We predict that the market size of China’s packaging equipment is likely to reach Rmb100.5bn in 2026, with a corresponding CAGR of 5.9% over 2022-26. Among them, the investment demand for intelligent packaging production lines in liquid food industries such as beverages and liquid milk is growing rapidly. We forecast that the domestic market of the liquid food packaging equipment will increase from Rmb27bn in 2022 to Rmb37.6bn in 2026, with a CAGR of 8.6%. 3） Competitive landscape: International giants represented by Tetra Pak, Krones, and KHS dominate the high-end market, particularly in the packaging equipment for beverages and liquid milk. Based on these companies’ annual results, their total revenue in 2022 was Rmb137.8bn, accounting for about 47% market share, while the top five domestic packaging equipment companies took a combined global market share of less than 3% in 2022 according to the data from the annual results and China Food and Packaging Machinery Industry Association （CFPMA）。 In recent years, Youngsun Intelligent has continuously improved its product system, made breakthroughs in the mid-to-high-end market, gradually narrowed the gap with international giants, and stood out from local manufacturers.
Youngsun’s core competitiveness: Perfect product system and strong patent barriers.
The Company possesses solid and well-developed core technologies at the foundational level, and it has established a series of comprehensive product systems. The main products include more than 40 product categories and more than 400 specifications and models. In recent years, it has successfully developed industrial robots and direct machine control （DMC） platforms, completing the integration and development of intelligent packaging system products. As a result, the revenue from intelligent packaging production line business has grown rapidly, enabling the Company to transition from a standalone equipment manufacturer to a provider of system solutions, comparable to leading overseas enterprises. The Company attaches great importance to R&D and innovation. In 2022, the R&D investment exceeded the total R&D investment of the second to fourth domestic packaging equipment companies combined. It has established a relatively strong patent technology barrier. By the end of 2021, the Company held 488 domestic patents and 39 overseas patents, including a total of 88 invention patents, ranking among the top in the industry.
Youngsun’s earnings drivers: Production capacity expansion ensures the earnings release.
The customization level and added value of the liquor packaging production line are higher, requiring packaging equipment companies to have stronger capabilities in customized design and integration. According to the Company’s annual report, the new orders in 2022 is nearly Rmb4bn, an increase of more than 20% compared with 2021, of which the liquor packaging production line orders was about Rmb1bn. In recent years, the Company’s business growth has been constrained by limited production capacity. According to its investment plans, the period from 2023 to 2025 will usher in the capacity expansion. By 2025, the Company's packaging equipment and packaging material production capacity will likely increase by 58% and 162%, respectively, compared to the levels in 2022, which will provide a solid foundation for the Company's earnings growth. Looking ahead, there is significant market space for packaging equipment in the beverage and room temperature milk industries. However, this market is largely dominated by international giants such as Tetra Pak and Krones. Therefore, it will be a key direction for the Company to break through. Through years of organic development and external M&As, the Company has built a solid technological and product foundation. In the future, the Company will likely gradually achieve import substitution in beverage and room temperature milk packaging equipment and materials, presenting considerable long-term growth opportunities.
Potential risks:
Fluctuations in macro economy; intensified market competition; significant fluctuations in raw material prices; risks of export business; risks brought by a large amount of inventory; the management risk after the mergers; the risk of invested projects; talent shortage and core technology leakage.
Investment strategy:
We forecast 2023E-25E operating revenue of Rmb3.57bn/4.65bn/5.98bn, and 2023E-25E ANP of Rmb370mn/490mn/650mn. We selected Xinjufeng Technology Packaging （301296.SZ） and Kinglai Hygienic Materials （300260.SZ） （its subsidiary mainly engaged in packing equipment and material business which contributed 47% to its revenue in 2022） as comparable companies. Given the average PE of the two comparable companies on 30x 2023E （Wind consensus estimates） and considering that Youngsun’s main business （packing equipment） and its business model are different from the comparable companies, we assign 25x 2023E PE. We also adopted discounted cashflow （DCF） valuation method to arrive at a reasonable market cap of Rmb9.31bn. Combining the above two valuation methods, we derive a target price of Rmb19 and initiate coverage with a “BUY” rating.
