Incident: On March 29, the company released its 2022 results, achieving annual revenue of 1,121 million yuan, +40.29% year on year, and net profit of Guimu 248 million yuan, +54.27% year on year. In Q4 alone, revenue was 304 million yuan, +44.32% year on year, and net profit of the mother was 67 million yuan, +106.44% year on year.

Core view: The performance is in line with expectations. The previous performance forecast achieved net profit of 23—26 million yuan. The scale of business has expanded and profitability has been restored, thanks to ① improving market demand, and the company's production and sales are booming; ② in the context of poor global supply chains, average product prices have increased; ③ declining raw material costs. Looking ahead to 2023, the company continues to deepen customized cooperation with core customers, and the order scale has steadily increased. The mechanical parts technical reform (machining) project and the Liyuan Jinhe technical reform (foundry blank) project have all been successfully implemented, and the release of production capacity is expected to further support the expansion of business scale.

The scale of business is expanding steadily, and the growth rate in the construction machinery sector is impressive: by business:

① Compressor parts: Achieved revenue of 735 million in 2022, +21.55% year on year, accounting for about 65%, gross profit margin of 39.14%, +2.12pct year on year. At present, the company has established solid strategic partnerships with the world's leading compressor manufacturers Johnson Controls, Ingersoll Rand, Carrier Air Conditioning, and McQuay to provide customers with one-stop services from casting to finishing, participate in customer product development and design, and continue to be highly recognized by major customers;

② Construction machinery parts: Achieved revenue of 279 million in 2022, +93.99% year on year, accounting for about 25%, gross profit margin of 31.64%, +7.02pct year on year. The business scale in the construction machinery sector is growing rapidly. On the one hand, the core customer Caterpillar has deepened cooperation and new product contributions have increased. On the other hand, Liyuan Jinhe, which was acquired in 2021, achieved full-year consolidation in 2022; ③ Other components: mainly include the energy sector, which supplies wind power castings in small batches to domestic wind power manufacturers; as well as the food processing sector. Revenue of 106 million was achieved in 2022, +110.89% year on year, accounting for about 10%, gross profit margin of 30.39%, +2.19pct year on year.

Increased profitability and continuous optimization of internal management: In 2022, the company's overall gross profit margin was 36.47%, +2.21pct compared to the previous year. On the one hand, the US infrastructure law promoted a steady increase in overseas demand. Under tight global supply chains, the company's gross margin of overseas sales reached 39.32%, +11.75pct over the previous year. On the other hand, falling steel prices contributed to a decline in the company's direct material costs. Looking at the cost side, in 2022, the company's expense ratio was 10.31%, and the sales, management, R&D, and financial expenses rates were -0.24, -0.15, -1.45, and -1.36pct respectively. Expense control results were good. In the end, an overall net interest rate of 21.93% was achieved, +1.88pct over the same period last year. Profitability was improved when the holding subsidiary Liyuan Jinhe and the participating subsidiary Suzhou Liyuan lost money.

The company's fund-raising project progressed smoothly, breaking through the bottleneck in production capacity and laying the foundation for growth: in 2022, the company's fund-raising project “Technological Improvement Project for Adding 34,800 Sets of High-Precision Machinery Parts a Year” was successfully implemented, achieving the expansion of effective machining production capacity; the production capacity of supporting casting blanks was also added, and the technical improvement project of Liyuan Jinhe, a holding subsidiary of the company, was successfully put into operation. Through the establishment of a new resin sand casting production line, the existing business collaboration with Liande Co., Ltd. was realized.

At the same time, the construction of the company's “High Precision Machinery Parts Production and Construction Project” (integrated production capacity for foundry machining in Deqing) is progressing smoothly. After the project is put into operation, it will further enhance the production capacity of the company's foundry, machining and product assembly processes through the introduction of advanced induction melting furnaces, CNC machining centers and other equipment and outstanding talents, expand the scale of production and supply of the company's products, continuously enhance large-scale production effects, and consolidate the company's market position.

Investment advice:

We expect the company's revenue for 2023-2025 to be 1,386/20.60/2,864 billion yuan respectively, with a year-on-year growth rate of 23.7%/48.6%/39.0% respectively, and net profit of 30/44/60 million yuan respectively, with a year-on-year growth rate of 21.3%/47.2%/35.9% respectively, and corresponding PE of 21/15/11 times respectively, maintaining the “buy-A” rating.

Risk warning: raw material prices fluctuated greatly; macroeconomic fluctuations led to a decline in downstream terminal demand; capacity expansion fell short of expectations; loss of important customers; business development of acquisitions and participating companies fell short of expectations; estimates fell short of expectations.