Tongguan Copper Foil has been one of the rare players in China that have achieved leading advantages in both printed circuit board (PCB) and lithium-ion battery (LIB) copper foils. Its copper foil shipment was ranked among the top in 2021. With the rapid growth of the LIB copper foil market and the premiumization of PCB copper foils, we expect Tongguan to benefit from the profit growth driven by capacity ramp-up and product structural improvement. We assign 2.8x 2022E PB to derive a target price of Rmb20 and initiate coverage with a “BUY” rating.

A rare domestic player with leading edges in both PCB and LIB copper foils.

Tongguan has formed a dual-driver business model featuring both PCB and LIB copper foils and has built a more extensive product portfolio. Its capacity of electrolytic copper foils has reached 45ktpa, including 25ktpa of PCB copper foils and 20ktpa of LIB copper foils. In 2021, Tongguan's copper foil shipment totaled 41ktpa, outrunning its peers.

The demand for LIB copper foils maintains rapid growth, and PCB copper foils will be the next market focus.

We predict that the global demand for LIB copper foils will increase to 1.426mt with a CAGR of 36% over 2021-2025. We see high growth visibility of LIB copper foil demand. However, the rapid market expansion has also heightened requirements for the supply chain and cash flow management of companies. Gaogong Industry Institute (GGII) predicts that the global PCB copper foil sector will maintain robust growth, posting a CAGR of 6.8% over 2022-2025. High-performance PCB copper foils have relatively high technical barriers, and the current market is mainly dominated by companies from Japan, Taiwan and Hong Kong, where the competitiveness of mainland companies is relatively weak. High-end PCB copper foils are well-poised to become the next focus for mainland copper foil makers and a key growth driver for corporate profit growth.

The market share of Tongguan's PCB copper foils is ranked first in the Chinese mainland with a rising proportion of high-end products.

According to the data from ccfa.org.cn, Tongguan's market share in the PCB copper foil sector reached 7% in 2021, ranking first among mainland companies. The sales proportion of Tongguan's high-end very low profile (VLP) copper foil products exceeded 10% in 2021, benefiting from the sustained upgrades of PCB copper foil products. The latest hyper very low profile (HVLP) copper foil products have already entered the stage of customer introduction. Tongguan is currently working on a PCB copper foil project with a capacity of 10ktpa, which is planned to commission in 2022, and we expect the shipment and shipment proportion of its high-end products to rise further then, driving the profitability of the PCB copper foil segment to grow stably.

Tongguan recorded robust growth in LIB copper foil capacity, and customer structural improvement lowered costs.

According to the data from ccfa.org.cn, Tongguan's market share in the LIB

copper foil sector reached 6% in 2021, ranking sixth in the sector. However, the shipment of its LIB copper foils recorded fast growth, up by more than 70% YoY in 2021. The shipment proportion of its 6μm LIB copper foils reached around 40% in 2021, and its 4.5μm products achieved delivery in batches. The low yield of products has been a major pain point restricting the profit growth of Tongguan’s LIB copper foils. With the optimization of the downstream customer structure and the subsequent commissioning of the newly-added 25ktpa capacity of LIB copper foils, we expect a sustained improvement in the profit per tonne of Tongguan’s LIB copper foils.

Significant edges in synergies along the value chain backed by Tongling Nonferrous Metals.

Tongling Nonferrous Metals, the controlling shareholder of Tongguan, is a large-scale comprehensive copper manufacturer in China. It boasts rich copper ore resources and a leading supply capacity of copper products.

Through the synergies with the value chain of the controlling shareholder, Tongguan has achieved the optimization of transportation costs while securing the supply of raw materials. The synergies along the value chain will warrant the robust operation of Tongguan against the backdrop of sharp fluctuations in copper prices.

Potential risks: Intensified sector competition; changes in LIB copper foil technology routes; sharp fluctuations in copper prices; the demand growth in PCB and LIB copper foils missing expectations; disappointing progress of capacity ramp-up.

Investment recommendation: Tongguan has been one of the rare domestic players that have achieved leading advantages in both PCB and LIB copper foils. The Company is well-poised to benefit from the profit growth driven by capacity ramp-up and product structural improvement. We forecast its 2022E-24E attributable net profit (ANP) to be Rmb475mn/632mn/794mn, equivalent to EPS of Rmb0.57/0.76/0.96. Considering the relatively sharp fluctuations in the profits of relevant companies, the difference of Tongguan’s relatively high proportion of PCB copper foils compared with comparable companies, and the importance of corporate cash flow management for copper foil manufacturers, we apply PB valuation. With the comps valuation as a reference, we assign 2.8x 2022E PB to derive a target price of Rmb20 and initiate coverage with a “BUY” rating.