Investment positives

We initiate coverage on Nanya New Material Technology with an OUTPERFORM rating and a target price of Rmb30.38.

Why an OUTPERFORM rating?

A CCL market leader; products widely used in downstream industries. Founded in 2000, Nanya is one of China’s leading copper clad laminate (CCL) companies. The company has launched various conventional CCL products (e.g., FR4 and halogen-free lead-free CCL products) and higher-end CCL products (e.g., high-frequency high-speed CCL products and automotive CCL products). The firm’s products are used in downstream industries such as consumer electronics, computers, telecommunications, automotive electronics, aerospace, and industrial-control industries.

Upgrades of servers, construction of 5G networks to drive up sales volume, prices of high frequency & high-speed CCL products.

1. Servers: Over 2022 and 2023, we believe that Intel and AMD will launch server products that support PCle4.0 and expect such products to drive upgrades of materials and technologies, thus boosting demand for high-frequency high-speed CCL products.

2. 5G: China has clear goals for construction of 5G base stations. Changes in the structure of baseband units and antennas of 5G base stations have increased the number of components integrated on high frequency and high-speed CCLs. Meanwhile, 5G high-frequency signals require upgrades of electrical performance of CCLs, which expands the use of high-frequency high-speed CCL products.

No.2 market share of halogen-free lead-free CCL products; sales volume of such products to grow gradually. Nanya’s overall sales volume of halogen-free CCL products in 2020 was among the top-10 global players and No.2 domestically. Customers such as Huawei, ZTE, and Inspur have certified its high-frequency high-speed CCL products, and its new 112Gbps products were technologically on par with leading international firms in 2021. As its N4 plant has been operating since 2021, Nanya has production capacity for high-speed and high frequency CCL products and the ability to deliver such products to customers. We expect the sales volume of high-frequency high-speed CCL products to grow and create new growth revenue drivers as the firm begins to grow rapidly.

How do we differ from the market? We believe that Nanya's profit margins will improve gradually thanks to expanding sales, improving bargaining power in upstream and downstream industries, and a growing portion of automated production facilities. We think that launching higher-end products will help the firm offset the affect of industry-wide cycles.

Potential catalysts: Boom in the server market and construction of 5G base stations; rising market share of halogen-free lead-free CCL products; N4, N5, and N6 plants unleashing production capacity for high-speed and high-frequency CCL products.

Financials and valuation

We expect 2022 and 2023 EPS at Rmb1.95 in and Rmb2.86, implying a CAGR of 29.5% over 2021-2023. We also expect net profit attributable to shareholders to grow 14.4% and 46.5% YoY to Rmb457mn and Rmb669mn, as: 1) Nanya’s N4 plant is operational, and some production facilities of its N5 plant are complete; thus, production capacity expansion should boost revenue growth; and 2) the firm continues to attract customers for its high-frequency high-speed CCL products. The stock is trading at 12.4x 2022e and 8.4x 2023e P/E. We initiate coverage with an OUTPERFORM rating and a target price of Rmb30.38 (implying a target market cap of Rmb7.12bn, and 15.6x 2022e and 10.6x 2023e P/E), offering 26.1% upside.

Risks

Volatility in raw material prices; disappointing sales volume growth of high-frequency high-speed CCL products; product price cuts due to intensifying competition.