Event Overview: In 2022, the company achieved revenue of 1,207 million yuan, an increase of 7.5% over the previous year; net profit of the mother was 73 million yuan, an increase of 40.3% over the previous year; net profit of the non-return mother was 71 million yuan, an increase of 63.9% over the previous year.

2023Q1, the company achieved revenue of 305 million yuan, a year-on-year increase of 15.5% and a decrease of 4.7% over the previous year; the net profit of the mother was 20 million yuan, an increase of 53.7% over the previous year and a decrease of 23.6% from the previous month; net profit of the non-return mother was 119 million yuan, an increase of 50.2% over the previous year and a decrease of 23.6% from the previous month. The performance was in line with expectations.

Comment: Structural improvements hedge against the decline in sales and improvement in gross margin level ① Volume: In 2022, the company's production and sales volume declined year-on-year, and the share of stainless steel seamless steel pipe revenue increased. The company produced 104,600 tons of metal products in 2022, down 9.95% year on year; sold 102,900 tons of metal products, down 7.43% year on year. Influenced by the policy, the supply and demand relationship in the thermal power industry gradually changed from a buyer's market to a seller's market. The company's thermal power boiler tube orders increased markedly. Among them, the revenue share of stainless steel seamless steel pipes increased 5.95 pct to 24.79% year on year, and gross profit share increased 3.40 pct to 43.68% year on year.

② Price: Product price increases, and the company's gross margin improves. Despite the decline in the company's product sales due to the impact of the epidemic, the company adjusted the product capacity structure, expanded the production capacity of alloy steel and stainless steel pipes, and strengthened cost control, increasing gross margin by 1.86pct to 12.86% in 2022. On a quarterly basis, 2023Q1 gross margin increased 4.37 pct month-on-month, and increased 0.85 pct to 15.01% year on year.

The core focus of the future: demand for thermal power boiler tubes is released, product upgrades are accompanied by the release of production capacity ① Thermal power boiler tube tenders continue to increase volume, and supply and demand for super stainless steel tubes are tight. Experts expect to approve about 80 million kilowatts (equivalent to 80 GW) each year thereafter, which will bring in 200 million kilowatts of new installed capacity in the next three years. The upgrading of old coal power units will also further boost demand for super stainless steel seamless pipes. However, the supply barrier between S30432 and HR3C is high, making it difficult for new manufacturers to quickly enter the boiler plant supply system. Supply flexibility is limited, which is expected to support the price of thermal power boiler tubes.

② Actively start production to seize market recovery opportunities. In 2022, the company completed orders for more than 5,500 tons of S30432 products, accounting for more than 50% of the domestic S30432 small-caliber pipe market share. In order to actively seize the opportunities for recovery in the thermal power market, the total production capacity of 40,000 tons of stainless steel and alloy steel seamless steel pipes for special equipment in the company's fund-raising project reached the target state of use on March 31, 2023. The total amount of capital raised was about 160 million yuan.

③ Technological innovation achieves product leadership. The company signed the first batch of more than 200 tons of order contracts for TP310HCBN as the highest-grade domestic stainless steel material in the second half of 2022; a new nickel-iron-based HT700 superalloy, mainly used in advanced ultra-supercritical coal-fired generator sets at 700℃, is being developed; manganese-nitrogen-based austenitic alloy materials have entered the small-batch production stage and are expected to be put on the market in batches.

Investment advice: Benefiting from increased demand in the thermal power boiler tube industry and the continuous release of new production capacity, we expect the company to achieve net profit of 1990/294/336 million yuan respectively in 2023-25. Corresponding to the closing price on April 18, PE was 17, 11 and 10 times, respectively, maintaining the “recommended” rating.

Risk warning: project progress falls short of expectations; risk of rising raw material prices; downstream demand falls short of expectations, etc.