As one of the seven strategic emerging industries in China and one of the ten key areas of development under the “Made in China 2025” policy, the new material industry is considered the high-tech industry with the greatest potential in the 21st century, with significant impact on future development.
Global New Material International Holdings Limited (Global New Material) is a leading player in the market segment, with main products including natural mica, synthetic mica, silica, alumina and other base materials, all representative of the segment in new consumable materials featuring high market barriers, high added value and broad market prospects.
Global New Material published its IPO prospectus on 30 June 2021. Dealings in its shares on the Main Board of the Hong Kong Stock Exchange (6066.HK) are expected to commence on 16 July 2021.
I. Rapid growth of the new material industry empowers Global New Material’s great potential of development
Generally, growth stocks are of greater market potential than value stocks, and a company that grows faster than its industry sector usually shows growth in sales and profits. Many outstanding growth stock companies are leaders in some emerging industries. Global New Material has the characteristics of a growth stock company.
The fast-growing “new material” industry shows promising prospects
With its main products including natural mica-based and synthetic mica-based pearlescent pigment products, Global New Material has the core technologies required in producing synthetic mica, occupies a dominant position in the high-end market, and is at the forefront of advanced technology.
With breakthroughs made in production technology, the rise of scientific manufacturing, increased public awareness and recognition of synthetic mica-based pearlescent materials in the future, and the gradually increased consumption level, synthetic mica-based, alumina-based and other pearlescent materials will be widely applied in different application fields, and will have further space for market growth.
Frost & Sullivan forecasts that the market size of the global new materials market will reach RMB3,251.11 billion in 2024, with an average annual compound growth rate of 10.9% from 2020 to 2024. Frost & Sullivan also forecasts that from 2021 to 2025, the new material market segment in which Global New Material is will experience a compound annual growth rate of 23.9% and 30.8% respectively in the global market and the Chinese market, and a rapidly increasing quantity of pearlescent materials will be applied and demanded.
Moreover, there is a strong demand for high-end and high-performance pearlescent pigment products, and the fields of automobiles and cosmetics in which pearlescent pigment products are widely applied have been developing rapidly in recent years with an annual compound growth rate of 47.1% and 32.8% respectively from 2021 to 2025, which indicates that there is a strong demand for high-end and high-performance pearlescent pigment products, and that Global New Material is expected to further develop in this context.
Global New Material is building a second-phase plant for production of high-end products as synthetic mica-based products, triggering a new wave of growth
From 2018 to 2020, Global New Material revenue increased from RMB318 million to RMB569 million and remained on the steady rise in business performance, with a compound growth rate of revenue reaching 33.7%. The company achieved this business performance thanks to continuous increase in its product sales volume and its adjustments to product structure.
In terms of sales volume, the sales volume of Global New Material’s pearlescent pigment products increased from 8,451 tons in 2018 to 14,165 tons in 2020. In terms of revenue structure, the proportion of synthetic mica-based products in total revenue remained on the rise from 2018 to 2020, and increased from 21.8% in 2018 to 34.6% in 2020. Therefore, synthetic mica-based products have become one of the main pillars supporting Global New Material’s business performance growth.
In the industrial field, synthetic mica-based pearlescent materials can replace metal, organic and inorganic pigments. Synthetic mica-based pearlescent materials are priced at mid- to high-level, and are mainly applied in mid-to-high-end industrial, automobiles, cosmetics and other fields. Under the influence of the trend of consumption upgrade, increasingly higher requirements are made for the performance of pearlescent materials. Synthetic mica-based pearlescent materials will be widely applied in a wide range of application fields, indicating that such materials will enjoy market potential in the high-end market.
Frost & Sullivan forecasts that from 2020 to 2024, the domestic demand for pearlescent materials will be on the rise, especially in the high-end market represented by synthetic mica-based pearlescent materials.
In order to meet the strong demand in the market for high-end and high-performance pearlescent pigment products, Global New Material is building the second-phase plant to expand its production capacity and seize market potential of pearlescent pigment products. The plant is expected to be put into operation in 2021.
According to the prospectus, Global New Material will start trial production of 6,000-ton synthetic mica in its newly-added production capacity in the second quarter of 2022, and will further expand its production capacity to 14,000 tons in the second quarter of 2023 and to 30,000 tons in the second quarter of 2025.
II. Global New Material possesses many patents, core technologies, and sustainable competitive advantage
It is well known that in the investment philosophy proposed by Buffett, those companies with high gross profit margin in the industry have more advantages. Gross profit margin reflects a company’s ability to transform business operations into profit, and also reflects a company’s unique advantages in raw material pricing, production technology level, product competitiveness, supply-and-demand relations, market pricing power.
That is to say, gross profit margin directly reflects a company’s competitiveness. Gross profit margin of Global New Material was in the range of 46.2%-49.9% from 2018 to 2020. Can we see the unique advantages?
Global New Material possesses core technologies
Technological breakthroughs in the field of pearlescent materials has become one of the major trends in the future development of the industry. Regarding core technologies, breakthroughs in the technologies applied in producing synthetic mica are one of the key factors driving performance improvement of pearlescent materials.
At present, base materials used in pearlescent materials mainly include natural mica and synthetic mica, of which the former is scarce in China and is mainly imported from other countries and regions. Synthetic mica is a new material that features in big difficulties in R&D, low output, high added value and high technical barriers, and is currently in short supply in face of strong demand in the market. Besides, technologies applied in producing synthetic mica are of great importance for manufacturers to have a place in the high-end market.
As one of the few manufacturers with core technologies and capacity to produce high-end products, Global New Material is at the forefront of emerging technologies in the industry, possesses three patented technologies applied in producing synthetic mica, and has its core technologies and corporate strength being widely recognized in the industry.
In 2020, the market size of the Chinese synthetic mica-based pearlescent materials market reached RMB770 million, and in terms of the value corresponding to market share, top five players in the Chinese synthetic mica-based pearlescent materials market occupied a total market share of 43.3%. Among those top five players, Global New Material ranked first with a market share of 25.4%.
Global New Material has outstanding R&D advantages and highly-recognized R&D capabilities
The pearlescent material industry is a technology-intensive industry. Different technologies are required for production of pearlescent materials to meet the needs of different downstream industries. The competitiveness of a pearlescent material manufacturer in the increasingly competitive market depends on its strong R&D capabilities. Global New Material possesses industry-leading R&D capabilities, and has won many awards and titles such as “National Intellectual Property Powerful Enterprise”.
Global New Material has 12 registered patents and 26 patent applications, and has 40 R&D workers. The prospectus points out that in the past three years, R&D expenditures of Global New Material were RMB10.7 million, RMB23.2 million and RMB29.3 million respectively, which accounted for 3.4%, 5.3% and 5.1% of its total revenue, and that in the future, approximately 5% of its total revenue will be invested in its R&D activities each year.
Global New Material has significant advantages in business scale, and occupies a dominant position in the industry
With respect to production and marketing of pearlescent materials, huge investments are required in R&D, production sites, precision manufacturing equipment, introduction and training of R&D workers and technicians, market promotion, import and storage of raw materials, daily capital turnover and other aspects, and a long R&D and construction cycle is involved during which huge preliminary capital investments and a large amount of working capital need to be in place. Therefore, adequate operating capital and extensive accumulated R&D technologies are the key factors for success in the pearlescent material industry.
In the pearlescent material market which is fragmented, Global New Material, as the largest synthetic mica manufacturer in China, occupies a big market share and the dominant position, and has certain advantages in terms of financial support, technologies, patents and customer relationships.
Global New Material’s EPS in 2021 is HKD0.2342, and its price-to-earnings ratio is expected to be about 15X assuming the IPO price is HKD3.52. It is a cost-effective opportunity for investors in the secondary market to buy stock in a leading company in a market segment in the field of new materials that is innovative and has growth potential, profitability, strong R&D capabilities, core technologies and sustainable competitive advantages.