20180627-东英亚洲证券-彩客化学-01986.HK-Powering_the_world_s_batteries_7页_1mb

Equity Research Summary: Tsaker Chemical (1986 HK)

Core Content

Tsaker Chemical Group Ltd is a chemical company primarily engaged in the development of chemicals used for pigment products, with a focus on supplying to the pharmaceutical and agricultural chemical manufacturing industries. The company is also expanding into the lithium battery industry by producing cathode materials and related products. The report provides an analysis of the company's financial performance, business strategy, and market position, along with valuation and risk assessments.

Main Products and Market Position

Tsaker Chemical's major product categories and their market positions are as follows:

• Dye Intermediates:

  • DSD Acid: World's largest producer, with a 53.0% global market share in 2016. Expected ASP increase of ~70% from ~RMB18k/ton to over RMB30k/ton in FY18E.
  • DMAS: Second largest producer in the world, with a 19.8% global market share in 2016.
  • DATA: Derived from DMSS, with 64,000 tons capacity and 37% GPM in FY17.

• Pigment Intermediates:

  • DMSS: World's largest producer, with a 42.7% global market share in 2016.
  • DMAS: Second largest producer in the world, with a 19.8% global market share in 2016.

• Agricultural Chemical Intermediates:

  • ONT: World's largest producer, with a 53.0% global market share in 2016.
  • OT: 18.8% global market share in 2016.

• Battery Materials:

  • Iron Phosphate: Precursor for lithium battery cathode materials, with a designed capacity of 15,000 tons and current utilization rate of ~60%.
  • Carbon Nanotube Paste: Downstream material of NMP, with annual planned capacity of 2,000 tons.

Financial Performance and Outlook

FY17 Financial Highlights:

• Revenue: RMB1,247 million
• Gross Margin: 29.1%
• Net Profit: RMB136 million
• Net Margin: 10.9%
• Operating Profit: RMB209 million
• Operating Margin: 16.7%

FY18E and FY19E Financial Projections:

• Revenue: RMB1,607 million (FY18E) and RMB1,969 million (FY19E)
• Gross Margin: Expected to improve to low-to-mid thirties
• Operating Profit: RMB284 million (FY18E) and RMB386 million (FY19E)
• Operating Margin: Expected to increase to 17.7% (FY18E) and 19.6% (FY19E)
• Net Profit: RMB183 million (FY18E) and RMB260 million (FY19E)
• Net Margin: Expected to improve to 13.0% (FY18E) and 13.0% (FY19E)

The company is expected to achieve 28.8% and 22.5% YoY revenue growth in FY18E and FY19E, respectively. The net profit is projected to grow by 34.6% and 42.1% in FY18E and FY19E, respectively.

Valuation and Fair Value

• Fair Value Estimate: HK$6.10 per share
• Current Price: HK$4.78
• PE Ratio: 22x (FY18E) and 16x (FY19E)
• Forward PE Band: 20x (FY19E), representing the high end of the forward PE range.

Catalysts and Risks

Near-Term Catalysts:

1. Interim results for 1H18E
2. Potential shortlisting into the Shenzhen-Hong Kong Stock Connect list in 2H18E

Key Risks:

1. Unexpected turbulence in raw material costs
2. Regulation risk on chemical products due to environmental protection concerns
3. Economic slowdown

Shareholding and Management

• Major Shareholder: Ge Yi (68.63%)
• Management Team:
  • Ge Yi: Executive Director, CEO, Chairman
  • Jin Ping: Executive Director, VP (R&D in Technology)
  • Duan Weihua: Executive Director, CDO (Chief Development Officer)
  • Shi Qiang: Chief Engineer
  • Bai Kun: Executive Director, CFO

The company has a strong leadership team with extensive experience in the chemical industry and strategic development.

Production Bases and Capacity

• South Dongguang Production Plant (Hebei): Self-built, producing dye intermediates and lithium battery cathode materials
• North Dongguang Production Plant (Hebei): Self-built, producing pigment intermediates
• Dongao Production Plant (Shandong): Acquired in July 2016, producing agricultural chemical intermediates
• Dongying Production Plants (Shandong): Self-built with three stages of construction, producing dye intermediates

Peer Group Comparison

Tsaker Chemical's performance is compared with several peers and benchmarks, showing its competitive position and financial metrics.

Recent Reports and Analysts

• Analysts: Yuji Fung and Dallas Cai
• Recent Reports:
  • 26/06/2018: 2Q18E operations preview (BUY)
  • 20/06/2018: Downgrade on negative surprise in the abolition of rebate (HOLD)
  • 15/06/2018: Shaky claim by GMT makes no sense (BUY)
  • 11/06/2018: Upbeat May shipments as downstream picks up (BUY)
  • 14/05/2018: Downgrade on deteriorating GPM (SELL)

Disclaimer and Limitations

• This report is intended for institutional investors only.
• The information is for general circulation and not directed at any person or entity that is a citizen or resident of a jurisdiction where it would be illegal or prohibited.
• No representation or warranty is made regarding future performance.
• Oriental Patron may have issued other reports with different conclusions based on different assumptions and analytical methods.