3Q21 earnings slightly missed our expectations

Hexing Packaging Printing announced its 1-3Q21 results: Revenue rose 57.0% YoY to Rmb12.688bn, attributable net profit fell 6.0% YoY to Rmb205mn, and recurring attributable net profit rose 1.7% YoY to Rmb177mn. Net profit slightly missed our expectation due to higher raw materials prices.

By quarter in 1-3Q21, revenue grew 94.1%, 57.6%, and 34.7% YoY. Attributable net profit rose 66.2% YoY in 1Q21 but fell 11.5% and 32.3% YoY in 2Q21 and 3Q21.

Trends to watch

Revenue sustains rapid growth. Revenue rose 57% YoY in 1-3Q21 and 34.7% YoY in 3Q21. The firm returned to double-digit revenue growth since 3Q20 and still reported high growth in 2021, as: 1) competition intensifies due to raw material price hikes and tightening regulations on environmental protection, and the firm benefits from a higher sector concentration ratio; and 2) the rapid growth of new businesses (e.g. industrial value chain service and color boxes) fuel rapid revenue growth.

Profit under pressure. The firm’s gross margin fell 3.9ppt YoY to 9.2% in 1-3Q21, with 3Q21 GM down 4.5ppt YoY to 8.6%. We attribute this to price hikes for packaging paper - the prices of linerboard and corrugated paper rose 10% and 12% YoY in 3Q21. In 1-3Q21, major expense ratio fell 2.27ppt YoY to 7.42%. Specifically, selling, G&A, and financial expense ratios dropped 1.72ppt, 0.73ppt, and 0.01ppt YoY to 2.40%, 2.62%, and 0.66%, but R&D expense ratio grew 0.19ppt YoY to 1.74% in 1-3Q21. The firm’s net margin fell due to a lower gross margin. Net margin dropped 1.1ppt YoY to 1.6% in 1-3Q21 and 1.2ppt YoY to 1.2% in 3Q21.

Watch progress of new businesses and trend in profit margin. Moving beyond the traditional packaging business, the firm is exploring innovative business (e.g. value-chain services) and color boxes. We are upbeat on the growth potential of its new businesses. Innovative business: The firm is developing a value chain service based on its PSCP platform operation model to integrate and optimize the resources of the whole value chain and achieve smart coordination. Supply chain service saw revenue grow 81% in 1H21. Color boxes: The color box business caters to clients’ need for consumption upgrades. The firm has built good relationships with Midea, Google, and Goertek. It aims to build a packaging service ecosystem via four areas -M&A, smart packaging, supply platforms, and new bases, improving overall profitability and business strength. We suggest watching the prices of raw materials and changes in profit margin in the near term.

Financials and valuation

Given the unexpected raw materials price hikes, we lower our 2021 and 2022 EPS forecasts 7% and 8% to Rmb0.21and Rmb0.27. The stock is trading at 16.6x 2021e and 12.5x 2022e P/E. Maintain OUTPERFORM. Given the downward revisions to our earnings forecasts, we lower our target price 10% to Rmb4.77 (23x 2021e and 17x 2022e P/E), offering 40% upside.

Risks

Raw materials prices surge; new business and client acquisition disappoint.