2021 results miss our forecast

Hexing Packaging Printing (Hexing) announced its 2021 results: Revenue rose 46.2% YoY to Rmb17.55bn, net profit attributable to shareholders declined 24.7% YoY to Rmb218mn, and recurring attributable net profit dropped 25.1% YoY to around Rmb180mn. The firm's results missed our forecast due to the sharp increase in raw materials prices in 2021.

Over 1-4Q21, the firm’s revenue rose 94.1%, 57.6%, 34.7%, and 24.0% YoY to Rmb3.75bn, Rmb4.47bn, Rmb4.45bn, and Rmb4.88bn; attributable net profit stood at Rmb61mn, Rmb90mn, Rmb54mn, and Rmb14mn, with YoY growth of 66.2%, -11.5%, -32.2% and -81.2%.

Trends to watch

Revenue growth accelerates thanks to a higher sector concentration ratio. In 2021, Hexing's revenue grew 46% YoY, mainly thanks to a higher sector concentration ratio amid rising raw material prices and continuous efforts in customer expansion. Revenue from corrugated boxes, color boxes, and paperboard for industrial use increased 40.6%, 62.1%, and 85.0% YoY to Rmb12.78bn, Rmb659mn, and Rmb3.53bn. We think the firm's market share continued to increase thanks to a competitive customer base. Meanwhile, it actively expanded its presence in lower-tier markets, boosting the growth of its color box printing business. In 2021, Hexing's revenue from the cushion packaging business dropped 11.0% YoY to Rmb231mn.

Profit under pressure due to rising costs. In 2021, the firm's gross margin (GM) dropped 2.8ppt YoY to 8.6%, mainly due to the sharp YoY increase in the prices of containerboard and corrugated paper. The GM of corrugated boxes and paperboard for industrial use declined 1.3ppt and 0.9ppt YoY to 8.72% and 0.75%. In 2021, the firm's selling, G&A, and financial expense ratios fell 0.6ppt, 0.6ppt, and 0.02ppt YoY to 2.1%, 2.6%, and 0.6%, while R&D expense ratio rose 0.1ppt YoY to 1.7%. Its attributable net margin declined notably by 1.2ppt YoY to 1.24%, mainly on rising raw material costs.

Watch changes in raw materials prices and progress of new businesses. In 2021, the average selling prices of upstream containerboard and corrugated paper rose 22.6% and 20.1% YoY, weighing on the firm's profit. However, the price hikes have accelerated the exit of industry players with low production capacity, boosting the sector concentration ratio. Raw material prices have been declining since early 2022, with prices of containerboard and corrugated paper down over 8% compared with the highs in 4Q21. We suggest watching further cost reduction. In addition to the shipment packaging business, Hexing has expanded its presence in color box packaging and industry chain services. It has acquired well-established brands as clients, such as Xiaomi, Midea, and Philips. Supply chain services can help companies related to the industrial value chain consolidate resources and create synergies, in our view. We suggest watching the progress of customer acquisition and new business expansion in the future.

Financials and valuation

We keep our 2022 earnings forecasts unchanged, and introduce 2023 EPS forecast of Rmb0.31/sh. The stock is trading at 14x 2022e and 12x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb4.77. Our TP implies 17x 2022e and 15x 2023e P/E, offering 26.2% upside.

Risks

Raw materials prices increase rapidly; new business expansion.