It's almost a year since it went public, and Zhongbao New Materials (02439) still hasn't removed its “demon stock” hat.

According to data from the Zhitong Finance App, the stock price of Zhongbao New Materials began to make a U-turn upward after hitting a new low level on February 6. On February 20 alone, the company's stock price had risen by more than 40%. Although the stock price declined the next day, in just a few trading days, the company's stock price had already risen by nearly 150%, which can be described as intense. However, it is worth mentioning that just a month ago, the company experienced an astonishing decline of nearly 125% in two days, and instantly fell into the ranks of “fairy stocks.”

In fact, looking at it for a long time, this is not the first time that such a “roller coaster” trend has appeared. The Zhitong Finance App learned that a familiar scene occurred as early as June 2023. According to historical data, the company's stock price crashed on the afternoon of June 12 last year. In just three trading days, the company's stock price fell from a high of HK$1.65 to only HK$0.495, a cumulative drop of nearly 80%. Since then, the company's stock price started in mid-September. In the week of September 17 alone, the company's stock price has soared by more than 70%.

Investors called the “old routine” about this sharp decline and sharp rise. So what really happened behind this? What are the company's fundamentals behind this rollercoaster trend?

Under the holdings reduction announcement, “history” has been recreated

The Zhitong Finance App noticed that before and after the company's stock price plummeted and surged, the company's shareholder Eternity Strategy (00764) issued a number of holdings reduction announcements. Among them, on February 15, 2024, Eternity Strategy issued an announcement stating that it would sell a total of 4 million shares of Zhongbao New Materials at an average price of HK$0.6475 per share, with a total cost of about HK$2.59 million. From September 21, 2023 to January 19, 2024, Yongheng Strategy has sold a total of 7 million shares of Zhongbao New Materials at a total cost of HK$14.264 million. After the sale was completed, Eternity Strategy no longer held any shares in Zhongbao New Materials.

Coincidentally, the company's previous roller coaster trend was also related to shareholders' holdings reduction. According to the company's announcement, on October 3, 2023, the company's controlling shareholders Lvsetianye Technology Holdings Limited (“Lvsetianye”) and Lvsesenlin Technology Holdings Limited (“Lvsesenlin”) signed an agreement with no less than six buyers. Lvsetianye and Lvsesenlin will sell a total of 160 million shares of the company to the buyer Shares. The number of shares planned in this sale accounts for about 16% of the company's total share capital.

According to the Zhitong Finance App, Zhongbao New Materials was founded in 2014, and the company initially focused on the development and manufacture of non-biodegradable automotive plastic parts. Meanwhile, at the end of 2015, Jilin Province took the lead in implementing a “plastic ban” in the country. In response to national policies, Zhongbao New Materials began to gradually shift its business focus to developing and manufacturing biodegradable plastic products. The products include rolling bags, shopping bags, wrapping film, and masterbatches. Currently, biodegradable plastic products have become the company's main source of revenue, contributing more than 90% of its revenue.

According to the Frost & Sullivan report, based on the production and sales revenue of disposable biodegradable shopping bags in 2020, it ranked first among all manufacturers of biodegradable plastic products in Northeast China, accounting for about 39.3% and 39.9% of total production and sales revenue in Northeast China in 2020, respectively.

In recent years, the company's revenue performance has improved, but net profit performance has fluctuated slightly. In 2020, 2021 and 2022, the revenue of Zhongbao New Materials was 167 million yuan (RMB, same below), 257 million yuan, and 300 million yuan respectively, with a compound annual growth rate of 34.03% during the period. The net profit for the period was 49.272 million yuan, 78.417 million yuan, and 56.58 million yuan, respectively. Among them, the decline in net profit in 2022 was due, on the one hand, to the increase in listing expenses, and on the other hand, the company's sales expenses and management expenses also increased during the period.

However, in the first half of 2023, the revenue and net profit of Zhongbao New Materials once again increased by 32.9% and 20.3% to 182 million yuan and 38.175 million yuan, respectively.

The industry's prospects are improving, and it is difficult to overcome many “growth problems”

It is worth mentioning that at present, the company has expanded its business to provinces and cities including Beijing, Shandong, Zhejiang, Shanghai, and Guangdong, but judging from the share of revenue, the company's revenue is still very dependent on the Northeast market, and nearly 80% of the company's revenue comes from the Northeast market. In particular, in Jilin Province, about 75% of the company's revenue comes from this market. It can be seen that the company relies heavily on the single market of Jilin Province. Although it has expanded to other provinces and cities, the climate is still undeveloped.

As a result, the company's development space is limited, and the scale of the business is not very large. The Zhitong Finance App notes that in 2021, the market size of disposable biodegradable plastic products in Northeast China was only 787 million yuan, and there is not much market space. However, in recent years, China's relevant policies on plastic pollution control have been introduced frequently, and the goals for plastic pollution control have become increasingly clear. As controls are further tightened, this has directly driven the positive development of the disposable biodegradable plastic products market.

Among them, in 2020, the National Development and Reform Commission and the Ministry of Ecology and Environment issued “Opinions on Further Strengthening the Control of Plastic Pollution” to push China's plastic pollution control into the full chain management stage, and more clearly proposed a “timetable for further strengthening plastic pollution control”. Among them, it is stated that “by 2025, a management system for all aspects of plastic products will be established, and plastic pollution will be effectively controlled.” Subsequently, in September 2021, the National Development and Reform Commission and other departments jointly issued the “14th Five-Year Plan of Action” to further expand, refine and implement the “Opinions”. In May 2023, the Ministry of Commerce and the National Development and Reform Commission jointly issued the “Administrative Measures on the Use and Report of Single-Use Plastic Products by Commercial Operators”, which focuses on putting forward regulatory requirements for commercial operators to use and report disposable plastic products.

It can be seen that under the impetus of multiple policies, China is becoming more and more strict in controlling the pollution problem of disposable plastic products, which has also greatly contributed to the growth of the disposable biodegradable plastic products market. Judging from the market growth rate, the future of the industry is worth looking forward to. According to Frost & Sullivan's forecast, in the Northeast China market, the market size of disposable biodegradable plastic products will increase to 3,674 billion yuan by 2026, with a compound growth rate of 36.1% from 2021 to 2026.

Although the future of the industry is expected, the business development of Zhongbao New Materials is still inseparable from the situation of relying on a small number of customers.

The Zhitong Finance App notes that from 2019 to 2021, the company's revenue from the five major customers accounted for about 45.8%, 56.3%, and 52.7% of the total revenue, respectively. Among them, the largest customer accounted for about 15.5%, 14.6%, and 16.1% of the total revenue for the same year, respectively. It is worth mentioning that the company's customers generally sign a one-year framework sales agreement with the company for each purchase and place an order, not a long-term sales agreement.

Therefore, the company stated in the risk factors that the company cannot guarantee that major customers will continue to place purchase orders with the company according to the current purchase amount or price level, and may even not place orders. If the business relationship between the company and the main customer deteriorates or is terminated due to any adverse development in the operation of the main customer or due to other reasons, the company's business, financial situation, operating performance and prospects may be significantly adversely affected.

As can be seen, with the “plastic ban” culture, Zhongbao New Materials, which has only been established for ten years, has grasped the trend of the industry and has become the regional leader in the industry. However, due to various factors such as the dependence of major customers and the fact that the business is confined to the Tohoku region, the company is also facing “problems” in its growth.

In the stock market, some stocks with characteristics such as small market capitalization, low circulation, and unpopular business can easily become the target of speculation by various investors and institutions, thus attracting the attention of many investors. These stocks are not controlled by fundamentals, have abnormal trends, and are often regarded by the market as “monster stocks.”

As of the close of trading on the 21st, the stock price of Zhongbao New Materials was only HK$0.78, with a market value of less than HK$800 million. In comparison, Zhongbao's new materials clearly also meet the characteristics of “demon stocks.” This also indicates that even with the popularity of the concept of environmental protection and the support of the industry's broad growth space, Zhongbao New Materials is still a “monster stock” with high investment risks in the market, and careful observation or good policy.