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Orinko, Key Supplier of Midea Group and TCL, Files for IPO on Star Market
COVID-19 and China
In polymers we trust. Image credit: Carson Arias/Unsplash

► This might become one of the largest Star Market IPOs in 2020.
► Weak consumer demand during the COVID-19 outbreak will cut the company’s earnings.

Orinko Advanced Plastics (会通新材料), the mainland’s largest plastic materials producer, filed a prospectus with the China Securities Regulatory Commission (CSRC) on April 27. The company is planning to issue up to 137.78 million shares on the Shanghai exchange’s technology-focused board – the Star Market. (Check out our latest quarterly overview of the new venue.)

Headquartered in Hefei, Anhui province, Orinko may find itself in the middle of countless supply chains. The reason is on the surface: nowadays, synthetic materials are omnipresent. Plastic is everywhere

Polyolefin and polystyrene products that are widely used in consumer goods accounted for over 80% of the chemical firm’s operating income in each of the past three years. Meanwhile, its revenue grew from CNY 1.71 billion in 2017 to CNY 4.05 billion in 2019, stirred by huge deals signed with the key downstream partners, including Midea Group (000333:SH), AUX Group, Hisense, TCL Corporation (000100:SZ), Skyworth, to name a few. These five, for instance, made up nearly 42% of the company’s operating income, or CNY 1.7 billion, in 2019.

At the same time, the economy of scale has been driving the net profit margin up – the ratio was 1.8%, 2.1% and 3.1% in 2017, 2018 and 2019, respectively. While the number is not that impressive (by comparison, the average margin of the 100 companies currently listed on the Shanghai tech board was around 20% in 2019), it has been growing steadily.

Like any other crucial link of the global value chain, the firm is exposed to risks coming from both the upstream and the downstream. 

Damaged by the pandemic, short-term demand for consumer electronics, staples and other Orinko’s ‘zones of commercial interest’ plunged in the first quarter of 2020. Furthermore, it is not projected to recover quickly; thus, we are unlikely to see the industry growth continue this year. 

On the flip side, cheap oil can alleviate the cost-side burden. While this is a ‘plus’ factor for the chemicals producer’s margins, Orinko will, almost certainly, shrink in size this year. Moreover, this offering might be partly motivated by the lack of financing, which is vital to run the current R&D projects – the company spent CNY 170 million to push innovation in 2019, 137% higher than in 2018 and more than three times the CNY 55 million of 2017.

ANALYST
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