Net profit preannounced to rise 22% YoY in 2021

Jinjia Group preannounced its 2021 results: Revenue rose 21.3% YoY to Rmb5.08bn, attributable net profit increased 22.1% YoY to Rmb1.01bn, and recurring net profit grew 3.7% YoY to Rmb808mn. Based on its preannouncement, we calculate that its revenue and attributable net profit in 4Q21 increased 22% and 17% YoY to Rmb1.44bn and Rmb189mn. Its results were in line with our expectations.

Trends to watch

Revenue rose 21.3% YoY in 2021 thanks to new businesses. 1)Cigarette packaging: Sales prices of some products declined due to intensifying competition and the low bidding prices last year amid changes in tendering mechanisms (2021 prices were set in 2020 bids). In addition, Jinjia Group incorporated its high-end cigarette packaging business into the color box business. As a result, sales of its cigarette packaging products fell 4.1% YoY. We expect its cigarette packaging business to resume solid growth as it renews cooperation with China Tobacco Yunnan. 2) Color packaging: Revenue from this segment increased 23.5% YoY in 2021 thanks to the firm’s market expansion and product R&D on packages for alcohol, consumer electronics, and consumer goods. The firm also strengthened cooperation with Yanghe Brewery, Fen Wine, and Yunnan Baiyao. 3) Novel tobacco: Novel tobacco revenue soared 381.2% YoY in 2021 as the firm accelerated business expansion in the novel tobacco value chain, expanded its client base, and strengthened its capacity expansion.

Overall profitability stable. Attributable net profit margin was 19.8% (largely flat YoY) in 2021, reflecting the firm’s solid earnings. We expect its profitability to improve on the back of investment yields from equity acquisition and transfer as well as government subsidies. We think the traditional cigarette packaging business may have come under pressure as prices of some products dropped amid intensifying competition. Given that the firm is stepping up efforts in developing high-end and high-quality products, we expect its business transformation to partially offset the impact of price cuts.

Upbeat on color packaging and novel tobacco businesses. 1) Color　packaging: The firm continues to expand its presence in cigarette, alcohol, consumer electronics, and consumer goods. Thanks to the structural　upgrading of the tobacco industry, the high-end cigarette packaging business is booming. We estimate the size of each of the alcohol packaging and consumer electronics packaging markets has exceeded Rmb30bn. Considering that the alcohol packaging market is relatively fragmented, we expect leading packaging solution providers in China such as Jinjia Group to increase market share based on their quality products, efficient production, and sound services. 2) Novel tobacco: Overseas novel tobacco markets are growing rapidly, and the penetration rate of novel tobacco has ample room to increase, in our view. Jinjia Group is focusing on expanding its business, building new capacity, and acquiring new clients in the value chain of the vaping and heat-not-burning industries. We expect it to benefit from the standardization of regulations in these industries going forward.

Valuation and recommendation

We maintain our 2021, 2022, and 2023 earnings forecasts. The stock is trading at 20x 2022e P/E. We maintain OUTPERFORM and our target price of Rmb20, implying 23x 2022e P/E with 18% upside.

Risks

Unexpected increases in raw material prices; intensifying market competition; changes in regulatory policies.