Due to factors such as the low delivery base of the industry, the restructuring of downstream demand, and rising raw material prices, the company's 2022 performance fell short of market expectations. As the industry enters a boom cycle and the company's layout of new products accelerates, we think the company is expected to achieve significant performance growth this year. However, considering the decline in unit prices brought about by short-term downstream product restructuring, we lowered the company's 2023-2024 net profit forecast to 710/887 million yuan (the original forecast was 1,040/1,392 million yuan), the new 2025 net profit forecast was 1,116 million yuan, and the corresponding 2023-25 EPS forecast was 2.15/2.69/3.38 yuan. Referring to the valuation level of comparable companies (Hengrun Co., Ltd., Dongfang Cable, and Sun Moon Co., Ltd. were selected as comparable companies in the wind power components industry, Wind's average PE in 2023 was 22 times), considering that spindle bearings are a scarce track in the wind power components industry with domestic substitution logic, the company, as a leading enterprise that pioneered the localization and mass production of wind power spindle bearings in China, has obvious advantages in product layout and cost control. We believe that the company should enjoy a certain valuation premium, giving the company 27x in 2023, lowering the target price to 58 yuan (originally 58 yuan) (Target price 110 yuan), maintaining the “buy” rating.
The industry's installed base was low while costs were rising, and net profit returned to the mother in 2022 fell 38.54% year on year. In 2022, the company achieved revenue of 2,653 million yuan, +7.13% year on year; achieved net profit of 316 million yuan, or -38.54% of the same period last year, and realized net profit of 324 million yuan after deducting non-return to the mother, which was -33.14% year on year. We judge that the decline in the company's performance is related, on the one hand, to the fact that the overall installed capacity of the wind power industry in 2022 fell short of expectations and was transmitted to the components chain. On the other hand, it is also related to the fact that some OEMs have switched to a dual-feed technology path, causing the company's spindle products to face a product transformation period. The company achieved operating income of 701 million yuan in a single quarter of 2022/4, +21.40% compared with the previous quarter; the net profit of the mother was a loss of 18 million yuan. The company accrued asset impairment losses of $59 million and credit impairment losses of $46 million in the fourth quarter. The main reasons were loss of impairment of contract assets and impairment of the goodwill assessment of subsidiary Haozhi Machinery.
The company's profitability declined due to rising costs and short-term shocks in the product shipping structure. Looking at profitability, the company's gross margin in 2022 was 27.50%, down 3.32 pcts year on year; net interest rate was 12.38%, down 7.16 pcts year on year. Among them, the gross margin for the single quarter of 2022/Q4 was 23.09%, down 5.88 pcts year on year and 1.94 pcts month on month. Analyzing the core reason for the decline in the company's profitability, we believe that from the product side, it is because the price of the company's old model products was lowered in the context of the accelerated expansion of the industry. Previously, the proportion of shipments of double row tapered roller bearings and three-row cylindrical roller bearings, which had higher profitability, declined. From a cost perspective, the price of special steel on the raw material side increased, and at the same time, the pace of self-supply of forgings was hampered to a certain extent.
The product structure was switched to short-term pain, and the new product layout continued to break through the harvest period. Judging from the structure of the 2023 order framework agreement signed with Mingyang Intelligence previously disclosed by the company, there are 3,000 sets of yaw propeller bearings and 1,900 sets of spindle bearings, including 1,850 sets of land wind bearings and 50 sets of sea wind bearings. All spindle bearing orders are at the 4MW level or above. 6MW spindle bearing products account for more than 80%. The Haifeng bearing order also marks an important step for domestic production in the field of Haifeng spindle bearings. In terms of new product layout, the company's 2-5MW three-row cylindrical roller spindle bearings and 3-6.25MW beltless double row tapered roller spindle bearings have been mass-produced; 3-13MW single-row tapered roller bearings have been produced in small batches; and 12MW offshore typhoon-resistant spindle bearings have also been launched. The company's product range in the field of spindle bearings continues to expand, which also lays a solid foundation for the company to form cooperation with the main manufacturers of the double feed technology route.
The restoration of self-supply of forgings is expected to bring about a recovery in profit levels, and gearbox bearings will open a second growth curve. The horizontal integration of products and the vertical integration of the cost side are strategic goals that the company continues to promote. Profitability was damaged in the short term due to insufficient supply of raw materials due to the impact of the epidemic and other reasons. It is expected that this problem will be solved with the resumption of production of Shengjiu Forgings in the future. Spindle bearings and gearbox bearings that are being deployed are one of the few parts of the wind power industry chain that have not been localized, and their scarcity is obvious in the wind power industry, where demand for cost reduction is strong.
Under the trend of double feed in Lufeng's technology path, we expect the company's single-row cone and self-aligning roller bearings to enter the volume process this year. The company expects mass production of gearbox bearings to begin in '24, which is expected to achieve a breakthrough in the second curve to enhance the company's performance.
Risk factors: Downstream wind power installations fell short of expectations; the increase in the localization rate of wind power bearings fell short of expectations; raw material prices fluctuated greatly; the progress of putting new production capacity into production fell short of expectations; major changes in the technological path; product prices dropped significantly
Profit forecasting, valuation and ratings: Due to factors such as the low delivery base of the industry, the restructuring of downstream demand, and rising raw material prices, the company's performance in 2022 fell short of market expectations. Considering the decline in unit prices brought about by short-term downstream product restructuring, we lowered the company's 2023-2024 net profit forecast to 710/887 million yuan (the original forecast was 1,040/1,392 million yuan), the new 2025 net profit forecast was 1,116 million yuan, and the corresponding 2023-25 EPS forecast was 2.15/269/3.38 yuan. However, as the industry enters a boom cycle and the company's layout of new products accelerates, we think the company is expected to achieve significant performance growth this year. Referring to the valuation level of comparable companies (Hengrun Co., Ltd., Dongfang Cable, and Sun Moon Co., Ltd. were selected as comparable companies in the wind power components industry, Wind's average PE for 2023 was 22 times), considering that spindle bearings are a scarce track in the wind power components industry with domestic substitution logic, the company, as a leading enterprise that pioneered the localization and mass production of wind power spindle bearings in China, has obvious advantages in product layout and cost control. We believe that the company should enjoy a certain valuation premium, giving the company 27xPE in 2023, lowering the target price to 58 yuan (58 yuan) (The original target price was 110 yuan), maintaining the “buy” rating.