1Q22 results in line with our expectation

Hexing Packaging Printing announced its 1Q22 results: Revenue grew 4.3% YoY to Rmb3.91bn, attributable net profit fell 14.4% YoY to Rmb52mn, and recurring attributable net profit declined 14.5% YoY to Rmb48mn, in line with our expectations.

Trends to watch

Revenue growth slowed. The firm’s revenue grew 4.3% YoY in 1Q22. We attribute the QoQ slowdown in YoY growth to the declined end-market demand and disrupted production, logistics, and transportation amid the COVID-19 resurgence in multiple regions of China in 1Q22.

Raw material prices increased YoY; profitability declined. The firm’s gross margin fell 0.6ppt YoY to 9.11% in 1Q22, which we attribute to rising prices of upstream raw materials and relatively low capacity utilization rate caused by COVID-19. Expense ratio rose 0.4ppt YoY to 7.62% in 1Q22. Specifically, selling expense ratio dropped 0.1ppt YoY to 2.33%. G&A expense ratio increased 0.3ppt YoY to 2.83%. Financial expense ratio grew 0.1ppt YoY to 0.69%. R&D expense ratio rose 0.1ppt YoY to 1.76%. Affected by decreased gross margin and increased expense ratio, the firm’s profitability declined in 1Q22, with attributable net margin falling 0.3ppt YoY to 1.34%.

Watch the impact of COVID-19 on end-market demand and raw material prices. 1) Demand: The firm’s main product, linerboard and corrugated packaging, is widely used in industries such as consumer goods, manufacturing, and transportation. The COVID-19 resurgence in many regions of China in 1Q22 and tightened pandemic prevention and control measures led to a suspension of express delivery and logistics in many places, disruptions in clients’ production, and a sharp decline in downstream demand. We suggest paying attention to the impact of changes in pandemic prevention policies on end-market demand. 2) Raw materials: The firm’s costs mainly come from waste paper-based products such as containerboard and corrugated paper. Due to the tight supply of waste paper pulp in China amid a ban on waste paper imports, the prices of containerboard and corrugated paper surged in 2021. The ASP remains high despite a decline since 3Q21, weighing on the profitability of the packaging industry. We suggest paying attention to changes in raw material prices.

Financials and valuation

We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 12x 2022e and 11x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb4.77 (17x 2022e and 15x 2023e P/E), offering 45% upside.

Risks

Volatile raw material prices; expansion of new business disappoints.