The refractory industry has “two highs”: High cost of raw materials (over 50%) and high rate of margin (over 30%), which are far beyond general manufacturing enterprises. The main reason for this is the industry has relatively high requirements for technology, and downstream enterprises need stable and quality-assured refractories to ensure the sustainability, stability and safety of their production as well.
Industry trend one: The consolidation and merger of the refractory industry is an inevitable trend reflected by the upstream consolidation and intra-industry consolidation. The primary reason is that enterprises in the industry want to avoid gross margin fluctuations, and the second is because the integration of the downstream industries have triggered current integration of numerous refractory industries. The large downstream enterprises need large-scale and advantageous refractories to provide better services, and the integration of listed enterprises will occur in refractory enterprises that have resources or customers.
Industry trend two: Considering the need for energy saving, there is an obvious trend of using refractories with better quality, which constitutes a benefit to the industry with good technology and excellent products.
Industry trend three: The overall contracting is becoming increasingly prevalent in steel production. The high replacement rate of refractories decides steel production can be strongly guaranteed if receiving services from a professional company.
Industry trend four: Expanding overseas market and pursuing further development. At present, PRCO tops the list with the overseas sales of 20%.
Analysis on key enterprises: PRCO’s EPS is expected to be 0.48 yuan and 0.65 yuan for this and next year respectively, corresponding 30 times and 23 times of PE. Its upstream and downstream integration strategy is significantly faster than Beijing Lirr, but its overall contracting ratio also still has greater room for improvement, while considering the industry demand is on the rise, it is recommended to enlarge stakes. Luyang’s emerging ceramic fiber products enjoys wide range of uses, good performance and promising prospects. Its EPS is expected to be 0.8 yuan and 1.1 yuan for this and next year respectively. Ruitai Technology, following the energy-saving policy to invest in alkaline refractories, will show good performance after the release of production capacity.