Zhejiang Great Shengda Packaging(603687 CH)-Initiating coverage: recovering end-demand led Great Shengda’s profit uptrend to stabilize

The gist: BUY

·??????Robust growth?due to timely capacity ramp-up and business consolidation

·??????Corrugated box packaging market to grow on cost, supply, demand trends

·??????Quality customers; cigarette trademark, premium wine packaging barriers

·??????Smart systems sped up order responses and lifted operational efficiencies

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Robust growth due to timely capacity ramp-up and business consolidation

Zhejiang Great Shengda Packaging’s core product is corrugated boxes, which are widely used as inner and outer packaging for beer and other beverages, tobacco, electronics, home appliances, furniture, machinery, express logistics, chemical industry, clothing and other industries. It makes 3 types of cartons: regular, offset color and regular color. 22Q1-3 revenue came to RMB1.47bn, up 25.96% yoy, and net profit to RMB76m, up 60.59% yoy. Over 22H1, revenue amounted to RMB966m, up 28.04% yoy, and net profit was RMB53m, up 60.29% yoy. We attribute its robust business growth to:

·??????a production network strategy that aligns new factory rollouts with a rising market momentum, and this has driven steady growth in order and sales volumes;

·??????the acquisition of subsidiaries increased the number of entities and consolidated its business scope.

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Outlook: corrugated box packaging set to grow on cost, supply, demand trends

We expect the following trends will continue to stoke current boom in the corrugated box packaging business:

·??????cost: we expect Great Shengda’s raw material costs will decline and drive a gross margin increase;

·??????supply: the consumer upgrade trend would likely lead to rising concentration of the corrugated box industry, which would favor market leaders;

·??????demand: express deliveries are a main growth catalyst for corrugated box demand. The fast growth of the courier industry has boosted the market proportion of express delivery corrugated paper packaging, while the ecommerce and logistics industries have boosted corrugated paper demand volumes. The State Post Bureau estimates China made 122.5bn express deliveries in 2022, a yoy increase of about 13%.

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Quality customers; cigarette trademark, premium wine packaging market barriers

Longtime customers of Great Shengda Packaging include Panasonic, Samsung Electronics, Midea, Bosch (BOSCH), Nongfu Spring, China Resources Beer, Robam Appliances, Supor, SF Holding and Zhejiang China Tobacco, as well as other Fortune 500 and China 500 leaders and sub-sector leaders. Great Shengda’s downstream markets of household appliances, electronics, tobacco and alcohol are highly concentrated industries, where leading players prioritize the quality of their paper packaging products and set strict evaluation standards for their suppliers. To ensure the continuity and stability of their packaging supply, customers would tend to maintain long-term and stable ties with their qualified packaging suppliers.

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Healthy profitability: high ROE and high gross margin at 14.8%

Great Shengda had a gross margin of 14.82% in 22Q1-3, 6.05ppt above Hexing Packaging and 4.53ppt below LD Intelligent Technology. Other operating metrics:

·??????High inventory turnover and robust operating capacity: the company’s inventory turnover rate was 4.94x in 22Q1-3, 3.87 above LD Intelligent Technology and 1.37 below Hexing Packaging.

·??????Stable accounts receivable turnover: it has shown a slow downtrend recently, with a yoy decrease of 0.56 days in 22Q1-3.

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Smart production sped up order responses and improved operational capabilities

With smart equipment and IOT technology as a starting point, the company integrated multiple equipment systems and production control system data interfaces to build a data system for paper packaging production companies. The collecting, gathering and analyzing of massive data not only provides real-time online monitoring of production data but also achieves efficient linkage and the configuration of manufacturing resources and front-end orders, supply chain managementand logistics resources via a smart decision-making assistance system. The results are faster order responses and better production and operational efficiency.

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Valuation and risks

To value Great Shengda, we compare the company against packaging peers Hexing Packaging, Yutong Packaging Technology and Jihong Technology. We believe Great Shengda will outperform peers due to its stronger growth potential in 2023E. We assign a 2023E PE of 19.2-21.2x, implying a target market cap of RMB4.45bn-4.91bn, with our target price ranging RMB10.61-11.71. We initiate coverage with a BUY rating.

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Risks include: raw material price fluctuations; demand volatility; macroeconomic cyclical fluctuations; management risks related to business category expansion; and M&A projects and goodwill impairment risks. Note: our estimates have a degree of subjectivity and are for reference only.

Disclosure

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