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汇丰银行-中国-化工行业-中国染料、涂料产业:多姿多彩的新时代--95页.pdf
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汇丰银行-中国-化工行业-中国染料、涂料产业:多姿多彩的新时代--95页.pdf
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Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Equity Research Report
DateAsset | SubcategoryTitle of report
Chemicals
November 2019
By: Eric Shen (S1700519030001)
China Dyestu and
Paint Industries
Initiate coverage: A colourful new era
China’s leaders in the production of
dyes and paints are set to increase
their market share amid stricter
environmental and safety regulations
Bigger-than-expected production cuts
and government stimulus should aid
the bigger players
We initiate coverage of six leading
dyestu and paint companies; our
preferred stocks are Lomon Billions,
Oriental Yuhong and Zhejiang Runtu,
all rated Buy
1
Equities
● Chemicals
November 2019
To get a sense of how serious China is about cleaning up the environment, look no further than
the heavily-polluting dye and paint industries. They consume vast amounts of hazardous
chemicals to produce products that color textiles, decorate high-rise buildings and coat
electronics. But a deadly chemical plant explosion in eastern China in March this year rocked
these two industries with China now enforcing stricter safety and environmental standards. The
result is that thousands of small and medium-sized producers are now struggling to meet these
requirements and are forced to close, while the leaders are gaining market share as a result. In
fact, we see environmental investment becoming a competitive moat for dye and paint leaders
and transforming the industry away from just focusing on production cost.
In this report, we explore this and other key issues impacting the two industries, including:
Better supply: Industry production cuts to dyes and paints could be more severe than
expected given the tightened regulations that impact smaller producers
Better demand: Demand for dyestuffs and paints could surprise on the upside driven by
government stimulus supporting the textile, garment and construction industry
Outstanding defensiveness: Dyestuffs and paint are part of the broad chemical industry
which is being hurt by the slowing economy. However, we think dyestuffs and paint are
indispensable and demand is likely to stay robust
Share performance: With the sector very volatile this year, we show what has been driving
the stocks
We initiate coverage of six leading dyestuff and paint companies in China: we prefer Lomon
Billions, a leader in producing titanium dioxide (TiO
2
) pigment that is used in the manufacture of
paint and coatings, Oriental Yuhong, the No. 1 brand in China’s waterproofing coating industry,
and Zhejiang Runtu, the second-largest dyestuff player in China. We also initiate on Zhejiang
Longsheng and CNNC Titanium with Buy ratings and Skshu Paint with a Hold. All the
companies we cover in both industries have already left their rivals far behind in terms of scale
and should accelerate their pace of expansion going forward.
Why read this report?
China’s leaders in the production of dyes and paints are set to
increase their market share amid stricter environmental and safety
regulations
Bigger-than-expected production cuts and government stimulus
should aid the bigger players
We initiate coverage of six leading dyestuff and paint companies; our
preferred stocks are Lomon Billions, Oriental Yuhong and Zhejiang
Runtu, all rated Buy
Equities
● Chemicals
November 2019
2
Why read this report? 1
Executive summary 3
China dyestuff 17
China paint 22
Company section 34
Zhejiang Longsheng (600352 CH)
35
Zhejiang Runtu (002440 CH) 45
Lomon Billions (002601 CH) 53
CNNC HuaYuan Titanium Dioxide
(002145 CH) 62
Oriental Yuhong (002271 CH) 70
Skshu Paint (603737 CH) 79
Disclosure appendix 89
Disclaimer 92
Contents
3
Equities
● Chemicals
November 2019
Leading dye and paint companies to consolidate
It’s no surprise to find that China is the world’s largest producer of dyestuffs and paint products.
That’s largely because the textile, garment and construction industries – who are the big
consumers of dyes and paint – have played a crucial role in the country’s rapid growth and
development over the past 40 years. However, what we find today is that these two industries
are not only highly polluting but also dominated by inefficient small and medium-sized
producers.
We now expect these sectors to undergo major change with smaller producers gradually
phased out, due to the falling demand as the economy slows and tighter environmental
protection regulations. A higher concentration of property developers is also likely to reshape
the paint industry because larger property developers are more inclined to choose larger paint
brands. What all of this means is it should help the leading companies accelerate their market
consolidation and increase their earnings during cyclical upturns.
Exhibit 1. Upstream and downstream players in China’s dyestuff and paint industries
Source: HSBC Qianhai Securities
Executive summary
We believe the combination of slowing economic growth as well as
stricter environmental and safety regulations is a positive for dye and
paint leaders. We expect these twin forces will accelerate the
elimination of small- and medium-sized capacities and help lead
companies accelerate their market share gains. An added tailwind for
the paint industry is that the consolidation among property developers is
likely to benefit the paint leaders as big property companies are more
inclined to choose larger paint brands.
Equities
● Chemicals
November 2019
4
Exhibit 2. Booming demand from the textile, garment and construction industry has led
to large numbers of small and medium-sized dyestuff and paint producers
Source: Wind, HSBC Qianhai Securities
Why is China’s dyestuff industry worth investing in?
Dyestuff leaders have cemented their leading industry position
Since the 1990s, China has been taking a bigger share of the dyestuff industry with the country
now accounting for 70% of the global dyestuff production capacity. The sector is part of the
larger chemicals industry, and one of the few segments that is largely oligopolistic. Five leaders
- Zhejiang Longsheng, Zhejiang Runtu, Jihua Group, Jinji Dyestuffs and Yabang Corp. -
accounted for 67% of the country’s dyestuff production in 2018. They are mostly located in the
eastern coastal provinces of Zhejiang and Jiangsu where the textile industry is also centered
given the synergies between the two industries. Of them, Zhejiang Longsheng and Zhejiang
Runtu both have 22% each of the domestic dyestuff market, leaving competitors far behind and
enjoying an oligopolistic market position.
The dyestuff industry has recently been hit hard by an aggressive crackdown on lax
enforcement of environmental standards which has hit small and medium-sized producers
particularly hard. Dyestuff production, which hit a record high of nearly 1mt in 2017, fell sharply
by 18% in 2018, leading to a spike in prices that has benefited the leading producers. We also
highlight that demand for dyestuff has a high correlation to the output of polyester, used
extensively in clothing, given this is the material dyestuff is mainly applied to. Given we expect
China’s polyester output to grow at a CAGR of 6% in 2019-21e, we therefore see dyestuff
production growing at 5% CAGR c0.9mt as the efficiency of dyeing increases and leaders
continue to gain market share.
0
10
20
30
40
50
60
0
1000
2000
3000
4000
5000
6000
7000
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Construction industry GDP(RMBbn) Fiber production(mt, RHS)
Market economy
system was
established in
1992, forming
another group of
private
enterprises.
China joined the WTO in 2001.
The economy took off and
demand for paints and dyes
accelerated.
The opening reform
started in 1978 and
stimulated township
enterprises development,
which is the main driver
of China's private
economy
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