Investment positives

We initiate coverage on Nanya New Material Technology Co., Ltd. (NNMT) with an OUTPERFORM rating and a target price of Rmb30.38.

Why an OUTPERFORM rating?

CCL market leader; products widely used in downstream industries. Founded in 2000, Nanya New Material Technology is one of China’s leading copper clad laminate (CCL ) companies. The firm has launched conventional CCL products (e.g., FR4 and halogen-free lead-free CCL products) as well as higher-end CCL products (e.g., high-frequency and 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 sales volume and prices of high-frequency, high-speed CCL products.

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

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 integrated components used in high frequency and high-speed CCL products. Meanwhile, 5G high-frequency signals require upgraded equipment, which should expand the use of high-frequency and high-speed CCL products.

By market share, No.2 in halogen-free lead-free CCL products among domestic peers; sales volume to grow gradually. Measured by overall sales volume of halogen-free CCL products, NNMT was ranked among the top-10 global players and No.2 in China in 2020. Customers such as Huawei, ZTE, and Inspur have certified its high-frequency and 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, NNMT has production capacity for high-speed and high-frequency CCL products and the ability to steadily deliver such products to customers. We expect the sales volume of high-frequency and 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 NNMT's profit margins will improve due to expanding sales, improving bargaining power in upstream and downstream industries, and a growing portion of automated production facilities. We think launching higher-end products will help the firm offset the impact of industry-wide cycles.

Potential catalysts: Boom in 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 EPS in 2022 of Rmb1.95 and Rmb2.86 in 2023, implying a CAGR of 29.5% over 2021-2023. We expect net profit attributable to shareholders in 2022 to grow by 14.4% YoY to Rmb457mn and in 2023 by 46.5% YoY to Rmb669mn as production capacity expands with NNMT’s N4 plant operational and as some facilities at its N5 plant are completed, and with new customers for the firm's high-frequency and 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 TP 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 and high-speed CCL products; product price cuts due to intensifying competition.