Western Securities: The peak period of industry expansion has basically ended, and the profitability of two-piece metal packaging cans is expected to improve

According to the Zhitong Finance APP, Western Securities released a research report stating that the two-piece can industry has seen integration take place in Q1 2025, optimizing the competitive landscape. Currently, industry profits are at historical lows, with a gross profit margin in the low single digits. In comparison, overseas leaders like Ball and Crown have gross profit margins of 20%, while domestic profits peaked in 2019 with gross profit margins exceeding 10%. There is significant room for profit recovery in the future, and the firm believes that the downstream of the industry is a necessity and belongs to cash flow businesses, which should adopt DCF discount valuation. Related targets include ORG Technology (002701.SZ) and BAOSTEEL PACKAGING (601968.SH).

Key points from Western Securities are as follows:

The metal packaging two-piece can industry is one with stable downstream demand growth and stable cash flow. Two-piece cans are a type of metal packaging, with upstream raw materials primarily consisting of aluminum (accounting for about 70% of costs); downstream demand is mainly from beer (about 50%-60%) and carbonated beverages (about 20%-30%). The demand for two-piece cans in China's beer market is expected to grow at a CAGR of about 4% from 2019 to 2024, primarily driven by an increase in canning rates. China's beer canning rate has risen from 21.2% in 2016 to 29.6% in 2024, but it is still significantly lower than the global average of 43.8% and the 60-70% levels in developed countries like the UK and the US. In the future, the increasing share of non-ready-to-drink beer and product premiumization is expected to continue driving the increase in canning rates.

The industry is at a profit bottom in Q1 2025, and the integration and optimization of the competitive landscape are expected to gradually restore profits. In January 2025, ORG Technology's acquisition of COFCO was completed, raising the industry's concentration from CR4=75% to CR3=75%, with the leading ORG Technology's market share approaching 40% after the acquisition. After the merger, leading companies have a unified goal of profit-oriented operations and plan to relocate some domestic production lines overseas. The peak period of industry expansion is basically over, and domestic supply and demand are expected to continue improving in the coming years, gradually enhancing profits.

Referring to the previous round of industry consolidation, the gross profit margin in 2019 recovered to over 10%, with overseas leaders achieving gross profit margins of 20% and operating profit margins of 12%-13%. Current corporate profitability still has significant room for improvement. The last round of consolidation in China's two-piece can industry mainly occurred from 2017 to 2019, and after the consolidation, the industry's profits continued to recover in 2018-2019, with both unit price and unit gross profit increasing. In 2019, the gross profit margins for BAOSTEEL PACKAGING, ORG Technology, and COFCO Packaging for two-piece cans reached 13%, 10%, and 17%, respectively, marking recent highs.

Referring to the price increase cycle in the cement industry from 2016 to 2021, the firm believes that the current two-piece can industry is experiencing changes similar to those in the cement industry in 2016, having a basis for price increases but lacking the opportunity for price increases (such as rising raw material prices). The triggers for cement price increases in 2016 mainly included "supply contraction, industry consolidation, corporate willingness, demand growth, and cost increases." The current two-piece can industry has four of these factors but still lacks the "cost increase" trigger, which is worth closely monitoring in the future. However, there are differences in the downstream of the two-piece can industry compared to the cement industry, which may lead to less short-term price elasticity than cement. The downstream demand for two-piece cans is cyclically weak, steadily increasing with the rise in canning rates, while the downstream concentration is high, with the beer CR5 close to 80%, giving downstream players relatively strong bargaining power. In contrast, the cement industry's downstream is mainly focused on infrastructure and real estate, which are highly cyclical, and the downstream concentration is low with weak bargaining power. When demand improves, if supply cannot keep up, it can easily lead to significant price elasticity Risk Warning: The risk of severe fluctuations in raw material prices that cannot be promptly passed on to downstream, the risk of industry consolidation falling short of expectations, and the risk of intensified industry competition, etc