2022 results in line with our expectations

Estone Materials Technology （Estone） announced 2022 results: Revenue rose 42.65% YoY to Rmb603mn, and net profit attributable to shareholders grew 35.75% to Rmb147mn, in line with our expectations.

Trends to watch

Boehmite revenue jumped 46% YoY in 2022; shipments to markedly increase and earnings per tonne to rise in 2023.

Volume: Estone maintained its leading position in the global boehmite market. Its shipments of boehmite climbed 51% YoY to around 25,000t in 2022, accounting for more than 50% of the global boehmite market. The company expanded its presence in overseas markets. In 2022, demand from membrane companies in South Korea continued to increase. The firm sent samples of boehmite to Japanese membrane companies. Meanwhile, it cooperated with Sojitz （Shanghai） to gain market share in Europe.

German company Nabaltec and other overseas firms remain dominant in overseas boehmite markets. Overseas companies are raising boehmite prices, citing higher energy prices. This will likely help Estone increase its overseas presence, in our view.

For 2023, we think the firm's effective production capacity of boehmite will come in at around 60,000t. Furthermore, we think over time, existing customers may allocate a notably greater share of orders to the firm, thanks to the rollout of its high value for money product. This, coupled with its efforts to win new customers and the increased number of use cases, will likely push up its boehmite shipments to 50,000t in 2023. Its boehmite shipments may nearly double YoY, showcasing a strong alpha play.

Prices: In 2022, boehmite prices averaged Rmb19,000/t （down 3% YoY）。 We think boehmite prices at Estone will average Rmb18,000/t in 2023, as its current boehmite prices for major customers are lower than prices offered by other companies, and the downside potential of boehmite prices is limited, in our view.

Earnings: In 2022, GM of boehmite dropped 0.45ppt YoY to 43.53%. The firm cut boehmite prices in 2022, while efforts to reduce costs have yet to pay off. We think costs may decline more than 10%, as energy consumption per tonne of boehmite will likely drop and yield may increase thanks to the use of new techniques. In addition, net profit per tonne will likely increase steadily due to economies of scale and direct power and steam supply.

Estone is monitoring potential demand in the LiB industry; diversified product capacity to unleash growth potential in 2023.

Submicron high-purity alumina: Estone continues to expand the category of coating materials to meet the wide range of products its customers require. We expect its 5,000t/yr submicron high-purity alumina capacity to start production in 2Q23, and its shipments to reach 2,000t in 2023.

Thermal conductive spherical alumina: The rising adoption of alternative-fuel vehicles （AFV） and innovations in battery structure have led to growing demand for thermal conductive spherical alumina. Estone has entered the high-end of the market with products that are high-performance and has supplied these products in bulk to BYD. Estone continues to expand its high-quality client base in the end market for batteries, as well as in midstream materials, and others. We expect the firm to put its 9,800t/yr production line into operation in July 2023, and its shipments to reach nearly 6,000t in 2023.

Ceramic silicone rubber: The company has launched ceramic silicone rubber products, which is a low-cost solution to the issue of battery combustion caused by thermal runaway. We expect part of the new capacity to be put into production in 3Q23.

Low-α filler materials for high-end chip packaging: The firm has ongoing relationships with key customers such as Sumitomo and Samsung. We expect its 200t/yr low-α spherical alumina capacity to come online in 2H23.

Financials and valuation

We maintain our net profit forecasts at Rmb304mn for 2023 and Rmb603mn for 2024. The stock is trading at 25.5x 2023e and 12.9x 2024e P/E. We maintain an OUTPERFORM rating, but cut our target price 15% to Rmb55 to reflect slower growth in the sector. Our TP implies 36.1x 2023e and 18.2x 2024e P/E, offering 42% upside.

Risks

Penetration rate of boehmite coatings and new product development disappoint; market competition intensifies.