HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> looks to have kept its input cost managed and alleviated such pressure through hedging of raw material costs and raising product prices. The recent retreat in commodity prices upon the government's efforts to keep them under control also partly mitigates the pressure. Interestingly, the company sees influx of orders previously placed with smaller competitors as they are badly affected by elevated cost and power storage.The company revealed that its production has not experienced material interruption during power shortage as its plants are highly-graded by local governments. It continued to expect a stable margin for FY21 despite all disruptive factors in 2H21. At 7.8x PER and 0.65x P/B for FY22F, we think that CPMC is appealing after a 26% retreat in share price from the peak. Its ROE of 9.7% for FY22F is also a historically high level.

CPMC Holdings (906 HK) looks to have kept its input cost managed and alleviated such pressure through hedging of raw material costs and raising product prices. The recent retreat in commodity prices upon the government's efforts to keep them under control also partly mitigates the pressure. Interestingly, the company sees influx of orders previously placed with smaller competitors as they are badly affected by elevated cost and power storage.The company revealed that its production has not experienced material interruption during power shortage as its plants are highly-graded by local governments. It continued to expect a stable margin for FY21 despite all disruptive factors in 2H21. At 7.8x PER and 0.65x P/B for FY22F, we think that CPMC is appealing after a 26% retreat in share price from the peak. Its ROE of 9.7% for FY22F is also a historically high level. 

CPMC (906 HK): Cost Pressure Appears Controlled While Demand Looks Firm

<a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> has staged another set of good result with net profit grew 36.5% YoY and 20.6% HoH to a record of Rmb249.4m. It is encouraging to see that, even with sharp rise in raw material prices, its gross margin has just contracted marginally and gross profit still rose 20.1% YoY. We think this demonstrated the solid underlying product demand and its ability to pass on a significant portion of higher costs.In the post-result call, management looks to be very optimistic about 2H21, expecting good HoH recovery in margin. The ramp up in production capacity, further price hikes and solid structural demand growth are key drivers. We think CPMC will be able to achieve an ROE of 10% by FY22, and with record profit for next two years, its current 0.76x 12-month forward P/B is clearly not sufficient in reflecting its improvement in profitability over the horizon.

CPMC Holdings (906 HK) has staged another set of good result with net profit grew 36.5% YoY and 20.6% HoH to a record of Rmb249.4m. It is encouraging to see that, even with sharp rise in raw material prices, its gross margin has just contracted marginally and gross profit still rose 20.1% YoY. We think this demonstrated the solid underlying product demand and its ability to pass on a significant portion of higher costs.In the post-result call, management looks to be very optimistic about 2H21, expecting good HoH recovery in margin. The ramp up in production capacity, further price hikes and solid structural demand growth are key drivers. We think CPMC will be able to achieve an ROE of 10% by FY22, and with record profit for next two years, its current 0.76x 12-month forward P/B is clearly not sufficient in reflecting its improvement in profitability over the horizon.  

CPMC Holdings (906 HK): Healthy 1H21 Despite Rising Cost, Highlights from Post-Result Call

While rising input cost is a challenge to <a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a>, we found the company able to manage the impact following our brief chat with management. Pricing mechanism will allow the company to shift part of the higher cost to customers, while the good volume growth YTD can also alleviate the cost pressure. In our view, there may not be significant negative impact on margin on combination of these two factors.CPMC's new capacity plan has been moving ahead according to its schedule and this is expected to support stronger earnings for 2H21 as well. We believe CPMC's 0.85x 12-month forward P/B multiple (+1SD above historical average) can be justified by the escalating ROE since FY18 and the improvement in financial position.

While rising input cost is a challenge to CPMC Holdings (906 HK), we found the company able to manage the impact following our brief chat with management. Pricing mechanism will allow the company to shift part of the higher cost to customers, while the good volume growth YTD can also alleviate the cost pressure. In our view, there may not be significant negative impact on margin on combination of these two factors.CPMC's new capacity plan has been moving ahead according to its schedule and this is expected to support stronger earnings for 2H21 as well. We believe CPMC's 0.85x 12-month forward P/B multiple (+1SD above historical average) can be justified by the escalating ROE since FY18 and the improvement in financial position.   

CPMC Holdings (906 HK): Catch-Up with Company Indicates Cost Pressure Manageable

<a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> registered good FY20 result with a 28.9% YoY earnings growth. Pick-up in 2H20 is particularly solid, with an impressive 56.6% YoY growth. It is encouraging to see margin expanded across its all three business segments. Good profitability and cash received from Jiaduobao settlement have lowered its gearing to 43.6% in FY20, from 70.7% a year ago.Management is confident on the outlook for FY21, despite the rising raw material price. It is able to shift the higher cost to customers, though there may be some delays. Higher volume and price hike should drive further ROE expansion in the next two years - to an average of 9% from 7.7% in FY20. We believe its 0.75x 12-month forward P/B multiple is not expensive, and the 10% drop in share price yesterday places the stock on an even more attractive level, in our view.

CPMC Holdings (906 HK) registered good FY20 result with a 28.9% YoY earnings growth. Pick-up in 2H20 is particularly solid, with an impressive 56.6% YoY growth. It is encouraging to see margin expanded across its all three business segments. Good profitability and cash received from Jiaduobao settlement have lowered its gearing to 43.6% in FY20, from 70.7% a year ago.Management is confident on the outlook for FY21, despite the rising raw material price. It is able to shift the higher cost to customers, though there may be some delays. Higher volume and price hike should drive further ROE expansion in the next two years - to an average of 9% from 7.7% in FY20. We believe its 0.75x 12-month forward P/B multiple is not expensive, and the 10% drop in share price yesterday places the stock on an even more attractive level, in our view.

CPMC Holdings (906 HK): Sharp Rebound in 2H20; Management Stays Confident on FY21

We believe <a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> is an attractive alternative consumption play given its exposure to the rise in demand for food, beverages and household chemical product packaging in China. It is among the top player in China's packaging manufacturing (1-piece cans, 2-piece cans, tinplate packaging and plastic containers) with prominent customer profile including Coca-Cola, Tsingtao, Carlsberg, Blue Moon, Feihe, Yili and Jiaduobao etc. The combination of margin expansion, capacity growth and surging consumption demand, we expect CPMC to post a steady rising ROE. We expect special DPS payout on the receipt of Rmb1.5bn repurchase consideration from JDB settlement, and this will place its dividend yield at least at 7.8%. Its 8.9x PER and 0.69x P/B represent deep discounts to its customers (40x PER) and packaging peers (23.4x) which are unjustified in our view.

We believe CPMC Holdings (906 HK) is an attractive alternative consumption play given its exposure to the rise in demand for food, beverages and household chemical product packaging in China. It is among the top player in China's packaging manufacturing (1-piece cans, 2-piece cans, tinplate packaging and plastic containers) with prominent customer profile including Coca-Cola, Tsingtao, Carlsberg, Blue Moon, Feihe, Yili and Jiaduobao etc. The combination of margin expansion, capacity growth and surging consumption demand, we expect CPMC to post a steady rising ROE. We expect special DPS payout on the receipt of Rmb1.5bn repurchase consideration from JDB settlement, and this will place its dividend yield at least at 7.8%. Its 8.9x PER and 0.69x P/B represent deep discounts to its customers (40x PER) and packaging peers (23.4x) which are unjustified in our view.

CPMC Holdings (906 HK): An Attractive Inexpensive Alternative Consumption Play

China

CPMC Holdings Ltd. manufactures food packaging products.

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CPMC Holdings (906 HK)

CPMC (906 HK): Cost Pressure Appears Controlled While Demand Looks Firm

CPMC has raised prices to counter the elevated cost pressure from higher aluminium price. It also achieved good grades from local governments which...

Osbert Tang, CFA