1H22 results in line with our forecast

Nanya New Material Technology Co., Ltd. (NNMT) announced that revenue declined 5.82% YoY in 1H22 to Rmb1.88bn and net profit attributable to shareholders fell 61.70% YoY to Rmb82.89mn, implying an EPS of Rmb0.36. The results are in line with our forecast. We attribute the earnings decline to: 1) industry slump, disappointing demand, and falling product prices and sales amid COVID-19 and a macroeconomic downturn; and 2) rising raw material prices, R&D investment, and labor costs as new capacity ramped up.

Trends to watch

COVID-19 pandemic dampens end-market demand; continuous R&D investment to enhance competitiveness. In 1H22, NNMT increased R&D to optimize its product portfolio. The firm’s R&D expenses rose 59.86% YoY to Rmb48.54mn, ensuring its technological competitiveness, in our view. The firm realized flexible production by optimizing capacity allocation and integrating resources, offsetting the adverse impact of COVID-19. We believe that such moves also supported the firm’s capacity expansion and maintained its advantages in costs and market competition. We expect product sales at NNMT to increase as the market recovers.

Industries at the applied end offer development opportunities; achieving import substitution with leading technological innovation. Copper clad laminates (CCL) and printed-circuit boards (PCB) are indispensable components for electronic information products. We expect flourishing industries (e.g., 5G technologies, cloud computing, data center, internet of things, and artificial intelligence) at the applied end to boost demand for CCLs in the future. NNMT has been focusing its investment on high-end CCL products and expanding its presence in related markets. Its various high-end high-speed CCL products (e.g., VLL, ULL1, ULL2, and ELL CCL products) have been certified by Huawei. We think that NNMT’s products enjoy leading overall performance in China, and we believe that they will replace many imported counterparts. We believe that the development of industries at the applied end will boost demand for CCLs and that NNMT will benefit from the trend, backed by superior product quality.

Competitive client resources bode well for sustainable business operation; equity incentives to motivate staff. NNMT upgrades its products according to demand from original equipment manufacturers, original design manufacturers, and PCB clients. The firm has established cooperative relationships with customers from various market segments, and it continues to build new factories to enrich product lines and expand capacity. We think that the company earned recognition from a large number of customers and secured much cooperation because of its ability to ensure bulk delivery. NNMT established a series of mechanisms for personnel cultivation, and strengthening the abilities of employees and core management. It released its 2022 restricted equity incentive plan that covers 87 employees, and grants 6.27mn, Class II restricted shares. We expect the plan to consolidate capacity building of its employees.

Financials and valuation

Given the global impact of COVID-19 and a macroeconomic downturn, we lower our 2022 and 2023 net profit forecasts 15.2% and 12.3% to Rmb387mn and Rmb587mn. The stock is trading at 16.9x 2022e and 11.1x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb30.38 (implying 18.4x 2022e and 12.1x 2023e P/E), offering 8.8% upside.

Risks

Unstable raw material supply; volatile prices; disappointing downstream demand.