Incident: The company recently released its 2022 annual report and 2023 quarterly report, achieving revenue of 3.37 billion yuan in '22, +23.0% year on year; achieving net profit of 100 million yuan to the mother, -41.5% year on year.

23Q1 achieved revenue of 860 million yuan, +30.2% year on year; net profit returned to the mother was 0.7 billion yuan, +247.5% year on year. On a month-on-month basis, revenue in the first quarter changed -10.2% compared to the previous quarter, and net profit of the mother was +219.1%.

Performance reached an inflection point, and gross margin increased significantly in 23Q1. The wind power market was sluggish in '22, and the combined costs were still high, causing the casting business, which expanded production in '22, to fail to bear fruit. Since the beginning of '23, the prices of scrap and pig iron have declined markedly, driving the company's gross margin to go public, and the gross margin of 23Q1 has rebounded to 20.6%.

Demand for large megawatts of castings can be expected in '23 when wind power is ready for installation. The National Energy Administration announced that in 23Q1, China added a total of 10.4 GW of wind power installed, yoy +32%, a record high for the same period in nearly 6 years. In particular, in March, wind power increased by 4.56 GW in a single month, more than doubling the year-on-year increase. Among them, the proportion of large megawatts installed may continue to increase markedly. The average lifting capacity of China's onshore fans in '21 was 3.1 GW, while the average capacity of new orders for 22H1 onshore fans reached 5.4 MW. Large megawatt castings may have regained rapid growth after being rushed by the sea wind. The company's casting production capacity mainly targets large megawatt models, or may benefit from it.

Precision gearbox components are progressing in an orderly manner, and trial production of the first product is expected in 22Q3. The company's precision gearbox components project also targets the large megawatt fan market. The first batch of about 50 sets of equipment in 22Q4 has gradually completed installation and commissioning, and has entered trial production. In terms of market expansion, a strategic cooperation agreement was signed with Nangao Teeth on the supply of wind power gearbox components, which has now entered the small-batch supply stage. As production capacity is released one after another, precision gearbox components are expected to become the company's new profit growth point in 23-24.

Considering the delay in the progress of the company's main projects, we lowered the company's revenue and gross profit margin. After the adjustment, the company's 2023-2025 EPS was 1.48, 2.26, and 2.94 yuan (originally 2023-2024 was 1.79 and 2.69 yuan). The company's EPS 23-24 growth rate is expected to reach 53% higher than that of comparable companies by 45%. A 10% valuation premium will be given on the comparable company's 23-24X PE valuation, maintaining the purchase rating, and the target price is 38.48 yuan.

Risk warning

There are risks of increased competition in the large megawatt casting market for wind power, the risk that the large-scale process of wind power generation falls short of expected risks, the risk that product development or customer expansion of precision components for gearboxes falls short of expectations, the risk that demand for large steel castings falls short of expectations, the risk of fluctuations in raw material prices, and the risk of repeated global epidemics.