Key points of investment:

PLC started as a newcomer in industrial control, and its performance continued to grow rapidly. Hechuan Technology has entered the domestic industrial control automation market with PLC and has now achieved coverage of industrial control products at various levels. As of 202Q3, the actual controller Wang Xiangbin held a total of 19.18% of the company's shares, while the actual controller Wang Xiangbin and Hechuan Investment, the person acting in concert, held a total of 24.04% of the shares. The company's revenue CAGR for 2018-2021 was 38.5%, and the net profit CAGR of the mother was 29.9%. Performance continued to grow rapidly. Affected by the company's business adjustments, raw material price increases, and core shortages, etc., gross margin declined in 2021.

Laying out the 100 billion industrial control market, domestic substitution is worth looking forward to. According to data from the Industrial Control Network, China's industrial automation market reached 253 billion yuan in 2021, CAGR 12.2% in 2016-2021; aging is accelerating, average wages are rising, and industrial automation is the general trend; looking at the cycle, industrial automation is currently in the active inventory removal stage, which is expected to usher in a recovery cycle of passive inventory removal; the servo system market size is 23.3% in 2017-2021, which is a racetrack for rapid growth. The localization rate of servo systems in 2021 is 43.4%, and Hechuan Technology's market share is 3%. Occupy the “Dragon 2” position. The size of the PLC market in China is 8.6% CAGR in 2018-2021. Currently, the degree of localization is low, and there is plenty of room for domestic substitution. With policy support, outstanding cost performance, short delivery cycles, and relying on rapid downstream iterations of emerging manufacturing to “overtake the curve”, domestic industrial control can be expected to replace domestic production.

The cards are on a high-quality racetrack, and the technology and products are mature and ready to go. The company's product performance is close to that of foreign leaders, and it already has strong competitiveness; the company's business is concentrated in the booming emerging manufacturing industry, bound to industry leaders, has sufficient demand side momentum, and relies on the “servo+PLC” core product matrix to achieve overall solutions for multiple scenarios.

Profit forecasting and investment ratings Considering that the recovery of the manufacturing cycle takes time to transfer, we adjusted the profit forecast. The company's revenue for 2022-2024 is estimated to be 9.51, 14.34, and 1,941 million yuan respectively, with year-on-year growth rates of 27%, 51%, and 35%; it is expected to achieve net profit of 0.94, 186, 299 million yuan, and the year-on-year growth rate of -14%, 97%, 61%, corresponding to PE in 2022-2024 is 67.2, 34.2, 21.2 times, respectively. Considering the company's layout of the 100 billion industrial control circuit, benefiting from the help of the domestic production substitution process, and deeply binding the high boom in the emerging manufacturing industry downstream, it is expected to accelerate performance growth and maintain the “increase in holdings” rating during the manufacturing recovery cycle.

Risks suggest that the automation process has fallen short of expectations; the pandemic has repeatedly affected downstream construction; the recovery of the manufacturing industry has fallen short of expectations; market competition has intensified; and the prosperity of the new energy industry has fallen short of expectations.