Investment Highlights CITIC Securities Research? Professional supplier of high-temperature filter materials. TheCompany is a professional supplier of high-performancehigh-temperature filter material for bag filter, with its core businesscovering the R&D, production, and marketing of high-performancehigh-temperature filter materials, the core component of bag filter.
According to the Company’s 2010 annual reports, its income fromhigh-temperature filter materials accounted for ~96% of its core operatingincome. Currently, the Company ranks among top 3 in the market ofhigh-temperature filter materials for the thermal power industry. XiangboLuo and Honghua Luo, the actual controllers, hold 26.3% of stake in theCompany.
As multiple positives boost extension of bag filter, market demandwill increase notably. The increasingly stringent standards for sootemissions in thermal power (30mg/m3) and cement (particulate matteremissions in 2015E to be reduced by 50% compared with that in 2009),and other industries, import substitution, and comparative advantages ofraw material costs jointly bring broad prospects for bag filters. As the corecomponent, high-temperature filter materials will embrace peakdevelopment period. We project that during the 12th Five-Year Plan period,the market capacity of serving the thermal power, cement, and wasteincineration industries alone will stand at nearly Rmb 20.9 bn withaverage annual growth of more than 30%, and the demand for filtermaterial replacement warrants attention.
Higher concentration is expected amid combined competitive edges.
The Company’s products boast international competitiveness, and areexported mainly to Japan, Europe, and the US, with average annualgrowth reaching 72% over the past five years. The Company’s brand andadvantages in engineering performance that are accumulated over theyears can hardly be replicated, as well as improved “advisory services”,constitute the key factors for project acquisition. Additionally, theCompany has completed stock ownership incentives, and the stable coreteam is conducive to its long-term development. In the current contextwhere the Company has ranked among the top 3 in thermal powerhigh-temperature filter material, the Company is expected to gain moremarket shares by means of its leading position and track records whilethe cement and other industries are turning more concentrated.
With the elimination of capacity bottlenecks, the Company hasembarked on the fast track for growth. Thanks to outstandingcomprehensive advantages, the demand for the Company’s productsincreases year by year. With the operation of the new production line andits gradual realization of designed capacity, we predict thathigh-temperature filter products will contribute Rmb 290/460/640 mn ofincome in 2011/12/13E. Looking ahead, the Company is expected to offernew product, glass fiber filter material products, through M&A, and likelyintegrate upstream fiber manufacturers to diversify its product families,and to enhance its bargaining power for raw materials. Additionally, webelieve that marketing network development is an effective measure torespond to the changes in market demand, and the Company couldbenefit from the rapid growth of the filter material replacement market.
Potential risks: (i) Delayed emission-reduction-oriented transformation in thermal power and otherindustries due to policies being ill-executed; and (ii) operational risk arising from surging prices ofmajor raw materials and failure to promptly adjust selling prices of products.
Earnings forecast and valuation: We predict the counter’s 2011/12/13E EPS will come in at Rmb0.74/1.13/1.67 (2010 EPS of Rmb 0.40). We believe PEG valuation among relative valuation methodsis more appropriate. Based on the valuation of A-share comparables, and factoring in the Company’sdominant position and growth rate in high-temperature filter materials, we apply PEG of 1.4x to thecounter, set target price at Rmb 34.00, and initiate coverage with “OVERWEIGHT” rating.