1H22 results slightly miss our expectations

Hexing Packaging Printing announced its 1H22 results: Revenue fell 1.1% YoY to Rmb8.12bn, attributable net profit declined 29.3% YoY to Rmb107mn, and recurring attributable net profit dropped 28.2% YoY to Rmb92mn, missing our expectations due to volatile raw material prices.

Revenue rose 4.3% YoY in 1Q22 to Rmb3.91bn but fell 5.6% YoY in 2Q22 to Rmb4.21bn. Attributable net profit declined 14.4% YoY in 1Q22 to Rmb52mn and 39.5% YoY in 2Q22 to Rmb42mn.

Trends to watch

COVID-19 weighed on demand; 2Q22 revenue came under pressure. The firm’s revenue declined 1.1% YoY in 1H22 and 5.6% YoY in 2Q22. By product, revenue from corrugated boxes rose 8.3% YoY to Rmb6.3bn in 1H22, showing steady growth despite the impact of COVID-19. Revenue from color boxes grew 2.9% YoY to Rmb310mn amid sluggish demand from the downstream consumer electronics industry. Revenue from cushion packaging declined 41.7% YoY to Rmb81mn in 1H22, and that from paperboard for industrial use fell 30.8% YoY to Rmb1.2bn.

Profitability declined. In 1H22, the firm’s gross margin dropped 0.9ppt YoY to 8.64%. We attribute this to rising raw material prices and decline in capacity utilization ratio caused by COVID-19 resurgence in some regions of China. Expense ratio increased 0.1ppt YoY to 7.30%. Specifically, selling and financial expense ratios fell 0.1ppt and 0.1ppt YoY to 2.23% and 0.59%, while G&A and R&D expense ratios grew 0.3ppt and 0.1ppt YoY to 2.73% and 1.75%. Affected by decline in gross margin, the firm’s attributable net margin dropped 0.5ppt YoY to 1.31% in 1H22.

Watch progress in new businesses and changes in cost. The firm has established a packaging supply chain platform (PSCP) to facilitate resource integration and create synergies along the industrial value chain, which can also help reduce procurement cost. In addition, the firm has stepped up efforts to expand its presence in the high-GM color box packaging segment. Hexing has established strong cooperative relationships with clients such as Xiaomi, Midea, and Philips. We believe that the development of the color box packaging business can help optimize the firm’s product mix and enhance its profitability. As pricing strategies of the linerboard and corrugated packaging industry are closely related to raw material prices, we think that changes in raw material prices may affect the firm’s revenue and profitability, and suggest watching the trend of raw material prices.

Financials and valuation

Considering the impact of rising raw material prices and COVID-19 headwinds, we lower our 2022 and 2023 revenue forecasts 4.3% and 5.9% to Rmb17.92bn and Rmb19.65bn. We trim our 2022 and 2023 EPS forecasts 40.4% and 24.3% to Rmb0.16 and Rmb0.24. The stock is trading at 21x 2022e and 14x 2023e P/E. Given the optimization of the firm’s business structure, we maintain OUTPERFORM but cut our TP 14% to Rmb4.1 (25x 2022e and 17x 2023e P/E), offering 22% upside.

Risks

Sharp fluctuations in raw material prices; volatile demand due to COVID-19 resurgence.