1H22 net profit expected to rise 165.7-192.2%

Wankai New Materials preannounced 1H22 results: The firm's expected net profit rose 165.7-192.2% YoY to Rmb500-550mn, in line with our expectation. We estimate net profit increased by 47.3-82.2% YoY to Rmb211-261mn in 2Q22, mainly due to sufficient orders in hand. The firm took measures to improve its business operations and marketing, according to the preannouncement. Chongqing Wankai Phase II started operation in 1Q22, making a positive contribution to 1H22 earnings (600,000t PET production capacity). The firm reported non-recurring earnings of Rmb90-105mn, including a government subsidy of Rmb66mn and income from raw material futures of Rmb33mn.

Trends to watch

Exports are growing rapidly. The company’s production facility in Zhejiang has an annual production capacity of more than 1.2mn tonnes of bottle-grade PET. The products have the advantages of low unit energy consumption, are high quality and reliable. Also, the proximity to ports provides convenience for exporting products, in our view. According to sci99.com, China’s export volume of bottle-grade PET increased more than 40% YoY in 1-5M22 thanks to the robust overseas demand. We expect the export volume of the Zhejiang production facility to increase strongly in 2022, laying a foundation for earnings growth.

Bottle-grade PET industry to continue growing robustly; capacity expansion drives earnings growth. According to sci99.com, one new bottle-grade PET production line will put into operation in 2022, implying 5% capacity expansion. China’s apparent consumption may grow more than 10% YoY in 2022 due to accelerated replacement of traditional packaging materials and overseas demand, in our view. We expect the bottle-grade PET industry will maintain growth momentum in 2H22 (processing profit in 2Q22 was about Rmb750/t). The firm has an annual production capacity of 2.4mn tonnes, and we expect that the firm may expand production capacity to 3mn tonnes in 2023. Chongqing Wankai Phase III with a 600,000t/yr production capacity is under construction. We believe the company will expand its market share after new projects come on stream.

Chongqing production facility enjoys a geographic advantage.

We believe the cost of bottle-grade PET from the Chongqing production facility is about Rmb100-110/t lower than that of Zhejiang facility, mainly because production and raw material costs are lower, less electricity consumption (by about 28-30kWh/t), and the firm pays a preferential corporate income tax rate of 15% in Chongqing. We believe the firm has notable cost advantages over its peers.

Financials and valuation

Given the rising prices driven by the robust momentum of the bottle-grade PET industry, we raise our 2022 and 2023 earnings forecasts 26% and 30% to Rmb1bn and Rmb1.33bn. The stock is trading at 10.0x 2022e and 7.5x 2023e P/E. Considering the valuation pressure brought by the declining risk appetite for cyclical industries, we maintain our target price at Rmb37 (12.7x 2022e P/E and 9.6x 2023e P/E), offering 28% upside. Maintain OUTPERFORM.

Risks

Fluctuations in prices and supply of raw materials; intensifying market competition; high overseas revenue.