Investment positives

We initiate coverage of Xiamen Solex High-Tech Industries Co., Ltd.(Solex) with an OUTPERFORM rating and a target price of Rmb22.

Why an OUTPERFORM rating?

Export demand for sanitary wares strong; domestic sanitary ware market concentration increasing.

Solex's strong R&D capabilities and high-quality customers　create solid advantages: 1) Industry-leading investment in R&D and design with proven results; and 2) obvious first-mover advantages and stable cooperation with core customers.

Continuous innovation of business model and active　development of new categories: 1) Entering fast-growing beauty and health industries; 2) actively developing smart home business; and 3) launching Solex Home.

How do we differ from the market? We think the market underestimates Solex's R&D capabilities and its value as a core supplier of international bathroom brands, as well as the development of the firm's new categories and new integrated home decoration model. Potential catalysts: Stronger- than-expected export demand; rapid growth of beauty & health category.

Financials and valuation

Our EPS forecast over 2021?2022 is Rmb0.76 and Rmb0.94, implying a CAGR of 18.5%. The stock is trading at 25x 2021e and 20x 2022e P/E. We favor the firm as a leading innovative design manufacturer (IDM) in sub- categories of home furnishings, and we believe its dual-engine strategy (including its Solex Home business and plans to become a Sub- category IDM leader) will open a new chapter of intelligent manufacturing.We initiate coverage with an OUTPERFORM rating and a target price of Rmb22, implying 29x 2021e and 23x 2022e P/E and offering 15.8% upside.

Risks

Sharp fluctuations in raw material prices and exchange rates; substantial tightening of the real estate industry.