In-depth report on functional materials industry: Looking at the development opportunities of China's functional materials industry from giants such as 3M!

1. Benchmarking 30+ international giants with a market value of tens of billions of dollars, and the domestic functional materials industry has a lot of room for development

1.1. There are many international material giants, which are the cornerstones of high-end manufacturing in various countries. There are 31 companies with a market value of more than tens of billions of dollars.

Technology & industrial manufacturing is the core component of the economies of Europe, America, Japan and South Korea. According to our statistics, among the top 100 listed companies in Europe, America, Japan and South Korea by market value,

(1) From the perspective of market capitalization: Technology & industrial companies in the United States, Japan, South Korea, and Europe accounted for 51%, 53%, 55%, and 31% respectively;

(2) From the perspective of volume ratio: Technology & industrial companies account for 39%, 51%, 41%, and 35% in the United States, Japan, South Korea, and Europe, respectively.

The material industry is an important component of overseas technology manufacturing. Taking the United States as an example, there are three international giants with a market value of more than 100 billion U.S. dollars, namely Honeywell, 3M, and GE. There are also many international giants with a market value of more than 10 billion U.S. dollars such as Dow, DuPont, PPG, and Eastman. 

We sort out listed companies around the world. The United States, Europe, Japan and South Korea have 31 material companies with a market value of more than 10 billion US dollars. Representative companies include the American company 3M/Honeywell/GE/Dow DuPont, and the European company BASF/Linde/BASF , Shin-Etsu / Mitsubishi Chemical / Nitto Denko, South Korea's LGC, SDI, etc., provide reference for Chinese materials companies, and the future industry development space is expected to continue to expand.

1.2. There are obvious vacancies in the domestic materials industry, and there is plenty of room for development

The number of China's technology & industrial industries accounted for nearly 50%, but the market value accounted for only 33%. Compared with the 51% and 53% of the total market value of the US and Japanese technology & industrial companies, the total market value of my country's technology & industry is relatively low, about 12 trillion yuan. Although there are a large number of technology & industrial companies, most of them rank low and have a small market value. Compared with the United States has many technology giants, my country's technology & industrial companies are still in the stage of continuous development, and the future development space is expected to continue to grow.

Among the 46 technology & industrial companies, most of the top companies in market capitalization are midstream and downstream companies, and there are only 7 upstream companies, accounting for approximately 13.4% of the market capitalization. Among the 7 upstream companies, 5 are chip companies, and only Wanhua Chemical (representative of bulk industrial materials) and Enjie (representative of functional materials for electric vehicle lithium batteries) are two companies whose market value exceeds RMB 100 billion. In the future, domestic high-end materials companies will have a lot of room for development.

1.3. Dividends of the domestic materials industry in the next ten years: industrial upgrading + internal circulation

Since 2020, my country has repeatedly emphasized that under the new economic situation, a new dual-circulation pattern with domestic circulation as the mainstay should be formed as soon as possible. Compared with the business model of “two ends, big in and big out” of manufacturing companies importing a large amount of raw materials and overseas sales of finished products for many years, the internal circulation is through domestic substitution, and the technology and industrial supply chain are improved.

Accelerating the upgrade of the industrial chain is a necessary part of the manufacturing industry's internal cycle. At present, my country's manufacturing industry is still at the middle and low-end level, in the downstream of division of labor and specialization, high value-added products account for a relatively low proportion, and core components are heavily dependent on imports. From the perspective of the industrial chain, the upstream high-end basic materials of the manufacturing industry are currently highly dependent on foreign companies, and the continuous innovation and R&D of basic materials has become an inevitable trend. During the "14th Five-Year Plan" period, my country's demand for high-end products has increased, which has further encouraged my country's material companies to increase R&D investment, accelerate product upgrades, optimize product performance, and adapt to new market needs.

New infrastructure is a major starting point for internal circulation, and downstream demand drives the development of the new material industry. The new infrastructure is centered on digital infrastructure, including 5G, artificial intelligence, and industrial Internet. New materials are an important support for the development of digital infrastructure. Among them, the 5G industry's independent and controllable demand for upstream materials has increased, driving new material companies to innovate continuously and the industry is booming. As the second echelon of the new materials industry, my country's new materials industry is developing rapidly. The industry has made significant progress in a series of key technologies, the scale of the industry has continued to expand, the effect of industrial agglomeration has been remarkable, and the growth of leading companies has accelerated.

With the guidance of domestic policies and the increase in downstream demand, the new material segmentation leader will increase R&D investment, and will have the opportunity to become a platform-based enterprise in the future. At present, many leading enterprises in the new material segmentation field in my country have a single product line compared with the first-echelon companies in the United States, Japan and Europe. Under the influence of accelerating the realization of internal circulation, Chinese enterprises will continue to improve their independent innovation capabilities, achievement transformation capabilities, and Technology application research to promote industry transformation and independent innovation to achieve domestic substitution.

2. 3M: A model of an international functional material giant, with abundant products, diversified downstream, stable revenue and strong profitability

Among the global new materials giants, there are more than 30 companies with a market value of more than 10 billion U.S. dollars. Our research believes that 3M is one of the most representative companies. 3M downstream is very rich, with huge revenue volume, excellent financial indicators, and some of the company's product lines are similar to some domestic companies and have research value. Therefore, we choose 3M as an example for review.

3M has nearly 60,000 products covering many applications such as consumer, medical, industrial, and aviation. In 2020, the company's revenue/net profit were US$32.18/5.38 billion, gross profit margin/ROE were 48.41%/46.96%, and per capita revenue/gross profit/net profit were US$33.88/16.40/56.7 million. 3M's latest market value is about 120 billion U.S. dollars. It is one of the world's largest comprehensive materials companies. Compared with other international materials giants, 3M has advantages in business continuity and profitability.

2.1. Comparison of international giants: 3M has high profitability, relatively light assets, and enjoys a valuation premium

2.1.1. Summary of international material giants

Integrating more than a dozen materials giants with large market capitalization in the world,

(1) 3M, Honeywell, DuPont, Merck, Air Liquide and Shin-Etsu Chemical have a gross profit margin of more than 30%;

(2) 3M, Honeywell, and General GE have ROE over 15%. Among them, 3M's ROE reaches 47.0%, far surpassing other material giants;

(3) 3M, Dow, BASF, Fujifilm, LGC have a total asset turnover rate of more than 0.6. 3M's gross profit margin, ROE, total asset turnover rate, and fixed asset turnover rate are all at a relatively high level in the industry, and it has the characteristics of light assets and high profitability.

Six companies with comparable businesses are selected for comparative analysis:

3M has a large revenue scale, the highest net profit, and a good operating condition. In 2020, 3M's revenue was 32.18 billion U.S. dollars, second only to BASF (72.75 billion U.S. dollars) and Dow (38.54 billion U.S. dollars); 3M's annual net profit was 5.384 billion U.S. dollars, the highest among the following companies, and the overall operating conditions were good.

3M's profitability is high and stable: gross profit margin>40%, ROE 20-40%. In the long term, 3M and Merck have the highest gross profit margins. 3M's gross profit margin remained above 40% and increased steadily. In the past ten years, 3M's gross profit margin has the smallest fluctuation, and BASF's gross profit margin has declined to a certain extent. 3M's ROE is 20%-40%, leading the industry.

3M has a high asset turnover rate and is relatively light assets. 3M's total asset turnover rate and fixed asset turnover rate are relatively stable. The average total asset turnover rate in the past five years is about 0.84, and the average fixed asset turnover rate is about 3.6, which is maintained at a relatively high level and relatively lighter assets.

3M attaches great importance to R&D investment. From the perspective of R&D investment, in 2020, 3M’s R&D investment will be 1.878 billion U.S. dollars, second only to German Merck (2.814 billion U.S. dollars, mainly for R&D in the pharmaceutical sector) and BASF (2.566 billion U.S. dollars). R&D investment accounts for 5.8%. R&D investment is highly valued.

2.1.2. Germany Merck: focus on health care business, acquire Versum to strengthen the layout of electronic materials

The revenue is relatively large, mainly in the medical and health business, and the current revenue of electronic materials is relatively low. In 2020, Merck's revenue will be 20 billion U.S. dollars, of which life sciences and medical and health businesses account for more than 80%, and high-performance materials account for only 19%. The main products of the company's medical health and life science business include environmental monitoring, clinical diagnosis, etc., covering the environment, food, and medical industries; representative products of the electronic materials business include liquid crystal materials, wafer manufacturing and packaging solutions, involving semiconductors and automotive fields.

The color flat-panel liquid crystal display is the first to be launched, and the electronic materials business is growing on the basis of liquid crystal. Merck, Germany, has been researching nematic liquid crystal materials since 1968, and in 1984 introduced the world's first color flat-panel liquid crystal display. The company currently occupies more than 50% of the liquid crystal market, and display materials such as liquid crystals are the main products of the electronics business to promote its growth.

In 2019, it acquired Versum Materials for 5.8 billion euros to promote high-end electronic materials business. Versum Materials is mainly engaged in the development, manufacturing, transportation and processing of special materials in the integrated circuit (IC) and display industries. It provides materials including electronic special gases, etchants, and chemical mechanical polishing slurry. The acquisition of Versum helped Germany Merck advance its high-end electronic materials business and become a leading supplier of electronic materials.

Compared with 3M, German Merck has life sciences and medical and health businesses. In terms of high-end materials, German Merck uses liquid crystal materials as the basis to promote the layout of electronic materials, but the scale and application fields are not as good as 3M.

2.1.3. BASF: The largest revenue scale, covering agriculture, industry, upstream basic chemicals and other fields

The scale of revenue ranks first among materials companies, and its business covers agriculture and other fields. In 2020, BASF's revenue was US$72.748 billion, more than twice the revenue of 3M (US$32.184 billion). Among the global materials companies, BASF has the highest revenue. The company's products involve basic chemicals, electronics, agriculture, nutrition and health and other fields. Among them, BASF's scale in the agricultural field far exceeds that of Sumitomo Chemical, and other material giants have few agricultural businesses.

Core technologies such as chemical recycling, renewable, and other core technologies are connected with business departments to achieve an integrated structure based on chemicals. BASF's chemical business provides basic chemicals and intermediates for other departments. Through core technologies such as chemical recycling, process development, digitization and artificial intelligence, it can realize the development of characteristic material monomers, surface coatings, care chemicals, and digital agricultural products. Production and manufacturing, to achieve an integrated structure based on chemicals and core technologies such as chemical recycling and renewable.

As the material company with the largest revenue volume, BASF has a wider range of product applications than 3M. 3M has no layout in the agricultural field, and BASF has a large-scale business in the agricultural field. In 2020, the agricultural sector will achieve revenue of 9.421 billion U.S. dollars, which is close to one-third of 3M's total revenue.

2.1.4. Sumitomo Chemical: integration of petrochemical, basic chemical, and functional materials, full coverage of electronics, energy, and medical care

The revenue scale is relatively stable, lower than 3M. The company's revenue has been relatively stable in the past ten years, both maintained at around US$20 billion. From March 2020 to March 2021, revenue was US$20.726 billion, far lower than 3M's US$32.184 billion.

Mainly in petrochemical business, taking into account basic chemicals and high-end materials. Petrochemical products accounted for 30% of revenue, the highest among all business units. In addition to various petrochemical products, the company also owns basic chemical products and electronic optical materials such as etchants and polarizers, which involve the industry, agriculture, energy, and pharmaceutical industries. Sumitomo Chemical is the only company among the aforementioned material giants that also owns petrochemical, basic chemical, and electronic materials products.

In 2019, Sumitomo Chemical holds a controlling stake in Sanlizi to strengthen the automotive display polarizer business and promote the company's high-end materials sector. Founded in 1939, Sanlizi focuses on polarizer applications on TVs, laptops, car navigation systems and smartphones. Sumitomo Chemical's polarizer products have advantages in small and medium sizes such as mobile phones, but they are less used in the automotive field. By controlling Sanlizi, the company increased its share of the total production capacity of the polarizer market to 21%, strengthened the polarizer business for automotive applications, and achieved further development in high-end materials.

Sumitomo Chemical's high-end materials business mainly includes energy and functional materials, and electronic chemicals. It accounts for a relatively low revenue and is smaller than 3M. However, Sumitomo Chemical has a large number of petrochemical products and is dominant in the basic materials market.

2.1.5. Dow DuPont: Dow focuses on industrial products such as coatings and plastics, while DuPont focuses on functional materials such as electronics

Dow and DuPont merged in 2017 to become DowDuPont (DowDuPont) and their market value once surpassed BASF. In 2017, Dow and DuPont officially merged and went public in the name of Dow DuPont, with a market value of 130 billion U.S. dollars at one time, surpassing BASF as the world's largest chemical company.

Dow and DuPont dismantled three, retaining their strengths and complementing their weaknesses. In 2019, Dow and Corteva were separated and listed independently. Dow is mainly engaged in materials science, DuPont is mainly engaged in specialty products, and Corteva is mainly engaged in agricultural chemicals:

(1) Dow added the original DuPont functional materials business based on the original functional plastics and chemicals business. Dow Chemical's revenue is relatively large. In 2020, revenue will reach 38.542 billion U.S. dollars, higher than 3M's 32.184 billion U.S. dollars. The main products are functional plastics, chemical intermediates, high-performance materials and coatings, with an emphasis on upstream industrial products.

(2) DuPont added the original Dow electronic materials business based on the original nutrition and health, electronic communication, and safety protection business. Due to the independent spin-off and listing of Dow and Corteva, DuPont's revenue in 2019 and 2020 has dropped significantly compared to 2018, with annual revenue of approximately US$20 billion. DuPont integrated the former Dow's electronic materials business and increased the richness of its high-end material products.

(3) The two agri-chemical businesses, which have continued to lose money but are highly complementary, merged into Corteva, achieving mutual complementation of their disadvantages. At present, Corteva shares the same name as Syngenta.

2.2. Super growth across cycles

Since 1980, the market value of 3M has increased by more than 100 times, and the latest market value has been around US$120 billion; its revenue has increased by approximately 6 times, and its latest revenue has exceeded US$30 billion. Benefiting from the continuous expansion of product categories and the expansion of downstream areas, 3M's performance has continued to grow in the long-term, and the performance has driven market value growth by more than 100 times. The company's revenue exceeded US$20 billion/US$30 billion in 2008/2013, respectively. From USD 6.508 billion in 1980 to USD 32.184 billion in 2020, an increase of 395%, achieving super growth across the cycle.