Oriental Yuhong Analysis Report

Dongfang Yuhong is a company that maintains a high growth rate every year. After years of hard work, it has achieved sales revenue exceeding 10 billion, and has adopted the slogan "Ten Billion Yuhong", so For this type of typical growth company, the key is to grasp the company's growth. So is this company worth our investment now? Please see the text below.

01

Company Profile

Oriental Yuhong was established in March 1998 and went public in 2008. It has now developed into a company integrating waterproof material research and development, manufacturing, It is a leading enterprise in China's waterproofing industry that integrates sales and construction services. It is a national high-tech enterprise with a nationally recognized enterprise technology center and a postdoctoral research workstation.

Entering the construction waterproofing industry in 1995, for more than 20 years, Oriental Yuhong has provided high-quality and complete waterproofing system solutions for major infrastructure construction, industrial buildings, civil and commercial buildings, and has become a global waterproofing system service provider. Under the guiding ideology of "Serving the country with industry and benefiting the people with services", the company's investments also involve non-woven fabrics, building energy conservation, mortar and other fields. The company's subsidiaries include: Dongfang Yuhong (engineering business), Yuhong (civilian building materials), Woniushan (energy-saving insulation), Fuda (energy-saving insulation), Tiandingfeng (nonwovens), Fengxing (waterproof), Huasha (mortar), Lodi (diatom mud), Deaiwei (architectural coatings), building repair and other brands and business sectors. Oriental Yuhong holds more than 50 subsidiaries including Shanghai Oriental Yuhong, Hong Kong Oriental Yuhong, and Oriental Yuhong North America Co., Ltd., and has deployed 27 production, R&D and logistics bases across the country.

02

Industry Analysis

The company belongs to the construction waterproofing industry. Waterproof materials are very important building materials. Their quality and application effects are critical to the structural safety of construction projects. and life span play a very important role. With the rapid development of my country's national economy, not only industrial buildings and civil buildings have put forward diverse and high-quality requirements for waterproof materials; high-quality waterproof materials are also required in bridges, tunnels, national defense and military industries, agriculture, water conservancy, transportation and other industries and fields. Quality waterproof sealing material. It should be said that waterproof materials cover a very wide range in the construction field.

The reason why waterproof materials cover a wide range of fields is that there are currently many waterproof manufacturing companies. Except for a few companies with high overall level, most companies are small in scale, have backward technical levels and production processes, and the market is full of counterfeit products. Counterfeit and non-standard products, backward and overcapacity, unstandardized industry competition, and prominent environmental issues in the industry have led to low concentration and unstandardized market competition in the domestic construction waterproofing materials industry. At present, the company is in this "small company, big industry" structure, coupled with the external overcapacity reduction and strict supervision environment, I personally think it will bring a good development opportunity to the company, because the construction industry is the backbone of the national economy. The industry is also an important force driving the rapid growth of our country's national economy. Small companies in such a large industry are leading companies in subdivided industries. I think the future development potential of such companies is unlimited, and of course it is related to The company's management and strategic planning are inevitably related.

Figure 1: Output statistics of China’s waterproof building materials industry from 2010 to 2017 (unit: 100 million square meters)

Figure 2: Sales of China’s waterproof building materials industry from 2010 to 2017 Revenue

Summary: The construction waterproofing industry is a big industry. From the data analysis, the industry has a certain degree of prosperity. From the perspective of the national development strategy for infrastructure and construction, the industry's prosperity can be Expect.

03

Company fundamental analysis

(1) Business model

The company is a company with R&D, production, sales, technical consulting and It is a professional waterproofing system comprehensive service provider that integrates construction services. Simply put, the company makes profits by selling waterproofing materials and providing construction services. The company is in the midstream of the industrial chain, and the upstream is a supplier of waterproof raw materials for the petrochemical industry. Downstream is the construction industry, to which companies provide products and services. This business model is relatively comprehensive, the integrated process is not too complicated, and it has certain competitive advantages compared with some small businesses in the industry. In terms of procurement model, the company has long-term and stable cooperative relationships with suppliers, such as China National Petroleum Corporation, China Petroleum & Chemical Corporation, Dongfang Petrochemical Co., Ltd., etc. From the perspective of material supply, if the company can By maintaining a sustained and stable close cooperative relationship with upstream supplier companies, the company may be able to gain a certain advantage in costs. From the perspective of production model, the company is one of the most complete and complete waterproof materials for domestic construction. In other words, the company makes money in a wide range of areas. As long as waterproof materials are involved, the company can grab this area. The sales model adopts direct sales and distribution models. Direct sales can grasp the terminal end of the market, and distribution can face more demand groups.

Overall, the company's business model is very ordinary, with no bright spots, but it is relatively complete and mature. In this typical "small company, big industry", can this business model be sustainable? Bringing economic benefits to the company is the most critical. The industry gives the company unlimited possibilities and imagination, but in the end it still depends on how the company operates and develops. In addition, the company is in the middle of the industrial chain, and uncertainties at both ends will also bring considerable challenges to the company.

(2) Core competitiveness

1. Specificity

2. Research and development capabilities

The company’s Waterproof Technology Research Institute in 2009 In November, it was approved to become a "Nationally Recognized Enterprise Technology Center". It is the first national-level enterprise technology center in the domestic waterproof industry and the company is the only national key laboratory for building special functional waterproof materials.

The picture above shows the R&D expenses of all companies in the waterproof materials industry in the past 10 years. Among them, the main business of the first four companies is not waterproof materials, but only involves a small part. They are really related to The business of Oriental Yuhong Company is matched by Keshun Co., Ltd. It can be seen that Oriental Yuhong has invested far more money in research and development capabilities than other companies. This is obviously a manifestation of competitiveness. The company's technological development and innovation capabilities can In response to different customers' different requirements for waterproof materials, this R&D capability also builds the company's technical barriers. The continuous launch of new products will keep the company at the leading level in the industry.

3. Production capacity layout

The company has established production logistics R&D bases in North China, East China, Northeast China, Central China, South China, Northwest China, Southwest China and other regions. The company's production capacity is widely and reasonably distributed to ensure The company's products radiate to the national market with low warehousing and logistics costs, and have a competitive advantage that other competitors cannot match in terms of meeting customers' needs for diversified products and national supply requirements.

Summary: Generally speaking, the company has certain competitive advantages in the field of waterproof materials, especially in terms of R&D capabilities, which are at the leading level in the industry. R&D capabilities actually represent this kind of technical advantage. Maintaining this advantage can improve the company's production efficiency and bring it a higher rate of return, while also quickly meeting various market demands.

(3) Moat

1. Rate of return

Look at the company's gross profit margin. Here I only take Keshun, which matches the company's business. The specific data comparing the shares and the company are as follows:

From the perspective of gross profit margin, the gross profit margin of the two companies is basically maintained at a similar level, and there is no distinction between who is better and who is worse. Speaking of gross profit margin, let’s also take a look at the company’s performance over the years:

The above picture is the company’s gross profit margin in 2017. From the company’s internal perspective, the company’s gross profit margin is relatively high in the industry. The gross profit margin is mainly reflected in the sales of waterproof materials and products. The company's higher gross profit margin is mainly reflected in waterproof materials and waterproof coatings. The following chart shows the trend of gross profit margin in the past ten years:

2. The proportion of three fees and revenue situation

Let’s compare Keshun shares and the company’s ratio of three fees For comparison, the first picture above shows the three-fee ratio of the two companies. It should be said that the difference is not very big. The three-fee ratio of Oriental Yuhong is slightly lower than that of Keshun. After looking at the fees of the two companies in the past five years, According to the specific situation, it is obvious that Oriental Yuhong’s three-fee expenditure scale is much larger than that of Keshun Shares. Does this mean that Oriental Yuhong’s income scale is also much larger than that of Keshun Shares?

3. Conversion costs

The company is a small company in a large industry. The concentration of the industry is low. There are many waterproof production companies. The company does not have an advantage in conversion costs, and The company has not deployed industries in every corner of the country. All materials that can play a waterproof role will become the object of consideration by the demand side. In other words, Oriental Yuhong's waterproof materials are not the only choice for the demand side, and they are not available to users. It is sticky enough, so there is a certain risk of conversion in this regard.

4. Brand effect

The company is the first listed company in the domestic construction waterproofing industry. Since its establishment, it has undertaken a large number of waterproofing projects for national key construction projects and renovation projects, and has achieved Excellent operating performance has cultivated the company's brand. The "Yuhong" brand has been recognized as a "China Famous Trademark" and is the first "China Famous Trademark" in my country's construction waterproofing materials industry. The company has a certain brand effect in this regard.

Summary: After the above analysis, I personally believe that the company has a certain moat, reflected in scale and brand, but this moat is not strong. The company has no absolute advantage to prevent competitors from entering this industry, and The concentration of this industry is low, and the existence of many small companies may be the company's future competitors. These unknown risks will bring uncertainty to the company's future operating benefits.

(4) Growth Analysis (ROE)

The above picture is a list of the ROE levels of companies involved in the waterproofing industry in the past 10 years. Oriental Yuhong This company ranks second among these companies, but Golden Mantis' main business area is in the construction decoration and waterproofing fields, which is only a little bit involved, not its main business. Excluding Golden Mantis, Oriental Yuhong ranks first. Where is the higher ROE level reflected? We break down ROE and study it.

Return on equity (ROE) = net interest rate * total asset turnover rate * equity multiplier

1. Net interest rate

Let’s look at the upstream first Raw materials, the prices of raw materials are mainly affected by oil prices. The following figure is the trend chart of crude oil prices in the past 30 days and the trend chart of oil inventory and price changes in recent years:

In 2017, domestic crude oil production was 192 million tons. , has shown a downward trend for two consecutive years. In addition, my country is an oil-poor country and has a large consumption of crude oil. This has led to a high dependence on foreign crude oil in my country, reaching more than 65% in 2017. It seems that crude oil prices will remain at high and volatile levels in the future, so the company's material costs will also remain at a high level in the short term.

Look at the company's period expense history:

The company's financial expenses and sales expenses have been rising steadily over the years, mainly affected by the company's expansion of production. The company's financial expenses There has been a turning point, especially the huge increase in 2017, which is mainly affected by the interest costs of borrowing and issued convertible bonds. From the perspective of the company's future strategy, the company's goal is to expand the industry to all parts of the country, so period expenses will definitely need to be raised, three fees The proportion may still fluctuate at a certain level, and the possibility of decline is not too great.

So to sum up, based on the cost price, the company's net profit margin has limited room for improvement.

2. Total asset turnover rate

3. Equity multiplier

Generally speaking, the company’s higher ROE level is affected by higher net interest rate, higher The impact of a high total asset turnover rate and a high equity multiplier means that the three indicators that make up the company's ROE are relatively balanced. The company has the possibility of further improving its ROE level. The most important thing is to see whether the net interest rate and total asset turnover rate can further improve. However, the key to improving these two indicators lies in whether the company's operating income can be further expanded and whether costs can be reasonably controlled.

I have repeatedly mentioned the core term of the company’s operating income above. I would like to add that the company’s future revenue forecast is that from January to June 2018, the national infrastructure investment growth rate was 7.3%. Compared with The growth rate of 21.1% in the same period last year showed a cliff-like decline and dropped significantly. It is mainly related to the high pressure of the Ministry of Finance to clean up the hidden debts of local governments, and also to the substantial tightening of fiscal policy. Let’s take a look at the company’s revenue in the first half of 2018:

Currently, the company continues to expand its production capacity, with projects in the “New Building Waterproofing, Anticorrosion and Insulation Materials Production R&D Project (Phase I)” in Wuhu, Anhui, and Qingdao Projects with an annual output of 24 million square meters of waterproofing membranes, 40,000 tons of waterproof coatings, 200,000 tons of mortar and 10 million square meters of TPO projects have been put into production one after another, and the revenue growth rate is expected to further increase. I conservatively believe that the company's operating income will grow at a rate of 30% in the next three years. The company's revenue in 2020 will exceed 22.5 billion, and the company's revenue in the next five years will be close to 40 billion. Corresponding to the company's current market value of about 20 billion, it should It can be considered as good value for money. And I only made a conservative estimate here, and the market share of this level is still very low, so I think the company still has a lot of room for growth in the future.

(5) Security Analysis

1. Asset and Liability Structure

The picture above is a partial screenshot of the company’s 2017 annual financial report. A brief overview of the company’s total assets is 133 billion, with current assets of more than 9 billion, including more than 2 billion in monetary funds, more than 4 billion in accounts receivable, and 1.5 billion in inventory. Reserves of cash and cash equivalents are less than 3 billion. Let’s look at the company’s debt structure. The company’s total liabilities are more than 6 billion, current liabilities are more than 4 billion, and the asset-liability ratio is about 45%. Within the normal range, in the short term, the company’s current liabilities of more than 4 billion correspond to about 3 billion in cash and Cash equivalents, there is some pressure, but not a threat.

The above picture shows the trend of the company's asset-liability ratio in the past ten years. It is obvious that there was a significant turning point between 2013 and 2014, mainly due to the completion of the company's non-public issuance of shares. The increase in assets has led to a significant decline in the company's asset-liability ratio. In the past three years, the company's industry expansion and the issuance of convertible bonds have led to an increase in the asset-liability ratio. At present, it is within the normal range, but the company will continue to expand production capacity in the future. Whether increasing market share will affect the company's asset-liability structure requires continued attention.

Let’s take a brief look at the company’s capital flow. The company’s advance receipts + payables are about 1.5 billion, and receivables + prepayments + inventory are about 9 billion. Generally speaking (advanced receipts + payables )> (receivables + prepayments + inventory) can show that the company is very powerful and can use other people's money to make money. It reflects the company's bargaining power with upstream and downstream and the credit given to the company by upstream and downstream. Such a company will be in the market. Be in a strong position. It is obvious that the company does not belong to such an enterprise and has weak bargaining power. Of course, this is also a characteristic of the construction industry. There are most accounts receivable and advances, and funds are generally withdrawn at the end of the year.

2. Cash flow

04

Company valuation

1. Valuation from the perspective of the future

When valuing a company, we consider three aspects: first, the company's profit growth; second, the market environment; third, the importance of time.

(2) From the perspective of the market environment, the current market is in a bear market. I assume that the future market will continue to remain a bear market and even become more pessimistic. Then let’s take a look at the company’s pessimistic market performance over the years. What is the PE level corresponding to this situation? In 2008, when the market was at 2,000 points, the PE was around 17. In 2014, when the market was at 2,000 points, the PE was around 19. If calculated based on 17PE, then the company’s valuation in 2019 = 31.45 (17×1.85), and the valuation in 2020 = 36.04. The company’s current stock price fluctuates around 14 yuan. In comparison, the company’s market value is obviously lower than the market value. Underrated.

(3) Many times the reality is very different from your expectations. Why is this? I think this is the result of the nature of human nature, the irrationality of the market, and the lack of recognition by the market. However, prices will always fluctuate around value. With the important factor of time, prices will eventually return to value.

2. Historical interval valuation method

The above two charts show the company’s PE and PB trends in the past 10 years. From the PE chart, we can see that if there are PE opportunities in the company If the value is below 25, then the probability of profit is very high. The company's current PE=17.7, which is lower than the current opportunity value, can be said to have certain investment value. In addition, judging from the historical chart of the company's PB, the company's current PB=3.13, which is also lower than the current opportunity value of 4.12. Generally speaking, the company has certain investment space from both a PE perspective and a PB perspective.

In short, the company's current valuation is relatively cheap and deserves our attention.

05

Investment Suggestions

The reason why I analyzed the company Oriental Yuhong is because the structure of this company is very attractive to me. It is a typical situation of "small company, big industry". Small company refers to the leading company in the subdivided industry. Dongfang Yuhong is the leading company in the subdivided industry of building waterproof materials. In large industry, It refers to the infrastructure industry, which includes housing construction, high-speed railways, highways, urban roads and bridges, subways and urban rails, airports and water conservancy facilities, etc. These fields all involve waterproof materials. It is normal for this kind of waterproofing industry to have minor repairs every five years and major repairs every ten years. You can imagine how big this market is.

Most people pay attention to some rising targets, but pay little attention to those falling deeply. In fact, the beginning of a wave of market trends begins with being unable to see it, then looking down on it (thinking it is just a small rebound), then not being able to understand it, and finally being unable to catch up. When most people say that the bull market is coming, chasing after it is over. So human nature is like this, and it is clearly magnified in investment. In fact, many times what we make is human money. When human nature reaches its peak, it is also the time to make transactions.

At present, the company’s market share is about 1/10. The growth rate of operating income in the past three years has been able to maintain a steady increase. The operating conditions are normal, the cash flow is normal, and the financial data shows that it is relatively stable. Health, this is one of the most important reasons why I analyze this company. The company's current market value is around 20 billion, and the stock price has fallen by more than half since it fell from its highs. I personally think that the investment now is worth the money. So from a value perspective, I think we can consider building a position.

Any investment opinions or suggestions in the article are for reference only. The stock market is risky, so be cautious when entering the market.