Zheshang Securities: Gave Watson Technology a buy rating

2021-10-27Zheshang Securities Co., Ltd. Ma Li conducted a study on Watson Technology and released a research report "Watson Technology Review Report: Q3 growth rate is in line with expectations, the annual high growth is gradually cashed", this report gives a buy rating to Watson Technology, the current stock price is 36.18 yuan.

Watson Technology(605180)

Investment essentials

Q3 on a high base increase of 50%+, the expense side to make up for the impact of the decline in gross margin

The company released the third quarter report of 21 years: the first three quarters of the realization of revenue of 494 million yuan (+110%), attributable net profit of 150 million yuan (+114%); single Q3 income of 159 million yuan (+55%), attributable net profit of 0.48 billion yuan (+51%). The growth rate of Q3 performance has declined compared with the first half of the year, mainly due to the fact that 20Q3 companies have begun to increase their volume and have a higher base. From a month-on-month perspective, Q3 has declined compared with Q2, which is basically the same as Q1, mainly because May-September is generally the company's sales off-season, in line with previous expectations.

Gross margin decreased by 5.42pct year-on-year, mainly due to the off-season and rising raw material costs. Q3 gross margin of 38.4%, down 5.42pct year-on-year, the main reasons are: 1) compared with flexible materials, the difference between the off-peak season of airtight materials is more obvious, and the proportion of sales of airtight materials with higher gross margins in Q3 has declined; 2) the cost of raw materials has continued to rise since the beginning of the year, and the Q3 increase has exceeded the previous two quarters.

The ability to control fees has improved significantly, so there has been no significant decline in net profit margins. Q3 net margin of 30.07%, essentially unchanged from the same period last year, mainly due to a 2.12pct decline in expense ratio for the period. Among them, the Q3 sales/management expense ratio fell by 0.25/0.84pct to 0.49%/1.62% year-on-year under the scale effect; the financial expense ratio fell sharply by 2.78pct to -2.32%, mainly due to the increase in interest income from IPO funds; the company continued to increase its research and development capabilities, and the research and development expense ratio increased by 1.77pct to 3.89%. Q3 Operating cash flow of -3.33 million yuan, mainly due to the significant year-on-year increase in prepaid accounts paid for the purchase of raw materials.

The process leads the industry, with the dual growth logic of market growth and market share improvement

The company leads the industry in the process and has formed a gross profit margin level that is ahead of its peers: 1) taking the lead in using the hot-melt lamination process, with better fit and vividness; 2) the first manufacturer to use solvent-free slurry, reducing emissions while reducing production costs by 1 million+ million per year; 3) customizing and transforming lamination equipment, expanding from three-layer lamination to five-layer lamination, replacing tape splicing with ultrasonic sizing, and greatly improving production efficiency. 70% downstream of brushed air cushion materials are used to manufacture inflatable paddle boards, and the company, as the global leader in this segment (market share of about 1/3), has fully benefited from the rapidly growing downstream demand since the epidemic.

Brushed air cushion materials are the main driver of the company's future growth. 1) Capacity side: Since Q2, the company has orderly promoted the expansion progress of the fundraising project (4.5 million square meters of brushed base cloth) according to the order situation, and it is expected to reach full production in 23 years, and the production capacity will increase by nearly 150% compared with 20 years; 2) The client: The current performance growth of the company mainly comes from the growth of the original customer orders, and the company has developed new customers with good potential, and there is still room for volume in the future; 3) The order side: At present, some long-term orders have been confirmed, and customers will issue production tasks in batches according to market conditions. Some small and medium-sized customers are mostly short-term orders, and the Q4 scheduling situation is normal. According to the experience of previous years, Q4 is generally the peak season of the whole year, and the performance can be expected.

Earnings forecasts and valuations

The company's core products are steadily expanding, downstream demand is strong, production capacity digestion is guaranteed, it is expected that the company's net profit attributable to the mother in 21-23 years is 2.1/2.5/320 million, corresponding to a growth rate of 94%/21%/25%, corresponding to a valuation of 18/15/12X. As a hidden champion in the field of brushed air cushion materials, it has explosive performance and future sustainable growth potential, and the current valuation level is low, maintaining a "buy" rating.

Risk Warning

Capacity expansion is less than expected; risk of rising raw material prices; and repeated outbreaks

A total of 5 institutions have given ratings and 5 buy ratings in the last 90 days; the target average price of institutions in the past 90 days is 49.88; the Securities Star Valuation Analysis Tool shows that Watson Technology (605180) has a good company rating of 3 stars, a good price rating of 1 star, and a valuation comprehensive rating of 2 stars.