The company focuses on providing corresponding equipment for the production and utilization of various types of energy. The company, which has grown rapidly in recent years, is one of the top three power equipment enterprises in China. Its main business model is to develop, design, manufacture and sell advanced clean and efficient energy power equipment such as wind power, solar energy, hydropower, nuclear power, gas, thermal power, etc., and to provide engineering contracts and services to global energy operators.
In 2021, the company achieved operating income of 47.82 billion yuan, an increase of 28% over the previous year, and Guimu's net profit was 2.29 billion yuan, an increase of 23% over the previous year. The company continues to optimize the industrial pattern of “six electricity combined, five industries collaborated”. ROE, ROIC and ROA are rising year by year, and profitability continues to increase, reaching 7%/6%/2% respectively in 2021.
Giving full play to the supporting role of the new power system, pumped storage will double in the next 15 years, pumped storage medium- to long-term development plans. China's pumped energy storage will double. Installed capacity will increase from 31 GW in 2020 to more than 62 GW in 2025, and new projects started during the “14th Five-Year Plan” period are expected to reach 270 GW. Pumped storage equipment has entered the fast track of development, with an average annual added value of more than 45 billion yuan in 2021-2035.
The overall level of the company's hydropower products ranks among the highest in China. Cross-flow and mixed-flow hydropower technologies have reached the leading international level. The sales volume of the company's hydroturbine generators in 2021 was 8.1 GW, and the market share measured by production share was about 40%. In the field of pumped energy storage with higher qualifications, capital, and technical barriers, the company, as one of the oligarchs in large-scale pumped storage unit manufacturing, has reached a world-class level of unit development, which can meet the “high water level, high rotation speed, large capacity” power plant equipment needs. It is expected that in the future, it will directly benefit from the opportunity of large-scale distribution and national support policies, and the pumped storage equipment business will enter a rapid development path.
Wind power is being developed on land and sea, and large-scale fans have reduced costs and increased efficiency significantly
Under the steady promotion of the dual carbon policy, the domestic wind power industry achieved a combined growth rate of land and sea in 2022-2025 with good economic efficiency. Onshore wind power will grow from 45 GW in 2022 to 85 GW in 2025, with a CAGR of 24%; offshore wind power will grow from 6.5 GW in 2022 to 18 GW in 2025, with a CAGR of 40%. Due to the prominent cost reduction effect of large-scale fans, the production value of fan equipment in the mainland China market fluctuated between 170 and 200 billion yuan.
The company lays out the wind power market based on large-scale power equipment. 13MW offshore wind turbines are at the leading level in Asia. As the offshore wind project progresses to the deep sea, demand for large-scale offshore wind turbines will continue to rise. It is expected that the company's large megawatt wind turbine shipments will accelerate in the future, and market share is expected to increase.
Valuation and investment advice: first coverage to give an “increase in holdings” rating
We believe that the company is a leading domestic power equipment enterprise, deeply involved in large-scale hydroturbine generator technology. Its overall development level of pumped storage units has reached the industry's advanced level, and some key technologies have reached international leadership, setting a new benchmark for the industry. Since the production of large-scale pumped storage units has high technical barriers, the company will increase the layout of pumped storage equipment development and production. In the future, it is expected that Dongfeng will take advantage of the rapid growth of the industry to enter the quantitative and profitable growth channel. As the large-scale cost reduction and efficiency process of fans is accelerated, the company opens large-scale tenders for high-power models. Power generation equipment will continue to benefit from changes in the industry. Market share is expected to increase.
We expect the company's net profit to the mother to be 23.9/32.2/3.93 billion yuan in 2022-2024, with a year-on-year growth rate of 5%/25%/22%. The diluted EPS will be 0.77/1.03/1.26 yuan, and the corresponding PE will be 21.1/15.7/12.9x. Combining absolute valuation and relative valuation, we believe that the reasonable value of the stock is between 18.37-20.33 yuan, which corresponds to the 2023 dynamic PE range is 18-20 times. Compared with the company's current stock price, there is a premium of 13%-25% compared to the company's current stock price, covering a “increase in holdings” rating for the first time.
Risk warning
Valuation risks
We used absolute valuation and relative valuation methods. A comprehensive analysis from multiple angles revealed that the reasonable valuation of the company was between 18.37-20.33 yuan, but the valuation was calculated based on many assumptions. In particular, the calculation of the company's free cash flow for the next few years, the calculation of the cost of equity capital Ke, the assumption of a sustainable growth rate, and the selection of valuation parameters for comparable companies, all of which included many individual judgments, leading to the risk of valuation deviations. The details are as follows:
1. Estimates of the company's long-term revenue and profit growth may be optimistic, leading to the risk that the calculated value of free cash flow for the next 10 years will be too high, leading to the risk that the valuation is optimistic; 2. The cost of equity capital has a great influence on the company's valuation. The risk-free interest rate of 3.0% and the stock risk premium of 5.0% used in calculating Ke may all be underestimated, leading to the risk of the company's valuation being overvalued;
3. We assume that after 10 years, the company's TV growth rate will be 2.5%. The company's main industries include energy forms such as wind power and pumped storage. Currently, growth is good, and downstream demand is high, but in the long term, facing the possibility that industry growth will slow or even decline, then the company's continued growth will actually be low or negative, leading to the risk that the company's valuation is overvalued; 4. Relative valuation, we mainly focus on the company's 23-year average PE as a reference, and give the company a valuation premium of 1%-7%. The final judgment is that the company's PE is reasonable in '23. - Between 17 times.
The above valuation method has the following risks: there are differences in the selected comparable companies, the corresponding downstream applications of each company, differences in market competition factors and patterns, and the overall valuation level of the industry is too high.
The risks of profit forecasting
Risk of falling price/gross margin: Based on our judgment on the industry pattern and industry characteristics, we believe that the prices of wind power, thermal power, and hydropower unit products, which account for relatively high subsequent revenue, will remain at a high level. If competition in the subsequent industry intensifies, there may be a risk of a sharp drop in prices. The main raw materials of power equipment products generally include copper, steel, etc. If raw material prices rise further sharply, there is a risk that gross margin will fall.
Policy risks
Strong policy support: Pumped storage development is asset-heavy, long-term investment, and is highly dependent on provincial policy support. Currently, pumped energy storage is the main form of energy storage in China. It is an important starting point for the power generation side to achieve the “double carbon” goal. In the future, if local support for pumped storage project development and industrial chain construction falls short of expectations, there is a risk that the industry's growth rate will fall short of expectations.
Other risks
Frequent outbreaks of the epidemic in domestic and foreign markets may affect the company's normal production and delivery, as well as the construction progress of various energy projects, thus causing the company's sales revenue and profits to fall short of expectations.