Key points of investment

Profits increased significantly in 23Q1, and bearing products are about to be released.

In 2022, the company's revenue was 1,945 million yuan, a year-on-year decrease of 15.20%; the net profit returned to the mother was 95 million yuan, a year-on-year decrease of 78.55%. The company's revenue in the first quarter of 2023 was 433 million yuan, an increase of 16.36% over the previous year; it achieved net profit of 29 million yuan to the mother, an increase of 131.61% over the previous year. The decline in earnings in '22 was mainly due to (1) the impact of the epidemic, wind power construction progress was slow, and orders and prices for tower flange products fell; (2) transmission subsidiaries were in the construction period early, and expenses were high. The significant increase in profit in 23Q1 was mainly due to the fact that it benefited from a decrease in raw material costs and a significant increase in gross margin.

Flange: The leading giant megawatt advantage is stable, and the expansion of production capacity strengthens its leading position.

The company is deeply involved in the field of tower flanges and is the leading domestic wind power flange. It is currently one of the few companies in the world that can manufacture 7.0MW and above offshore wind turbine tower flanges. In 2022, the company's wind turbine tower flange business revenue was 918 million yuan, a year-on-year decrease of 24.01%, mainly due to the prudent start of construction in the wind power industry. The company's orders for wind turbine tower flange products declined, and prices fell. In 2022, the company's wind turbine tower flange was upgraded from 7MW to 9-12MW technology and actively expanded the production capacity of large-scale offshore wind power flanges. Hengrun Huan Forging achieved mass production of wind turbine tower flanges of 10MW and above in its existing plant, and the 50,000-ton 12MW large-scale forging project for offshore wind power is expected to be fully produced by the end of 2023, consolidating the market share layout and first-mover advantage.

Wind power bearings: Bearings were shipped in batches for the first time in '22. As soon as bearing products were released, the company expanded its wind power bearing business horizontally. A large-scale wind power bearing production line project with an annual output of 4000 sets was completed and put into use in July 2022, achieving a rise in production capacity from zero to 150 sets/month. The subsidiary Hengrun Transmission 22H2 completed construction. The new product, the 6MW three-row independent propeller bearing, was mass-produced in 22Q4, and the 8MW independent propeller bearing was in the bench test certification stage; in 2022, the company's wind power bearings achieved revenue of 112 million yuan, and the subsidiary Hengrun Transmission lost 21 million yuan. After the rise in wind power bearing production capacity is completed, product shipments are expected to improve profitability; the company is expected to use its own advantages to carry out wind power main bearing research and development, benefiting from the trend of domestic replacement of wind power main bearings.

Profit forecasting and valuation

Lower the profit forecast and maintain the “buy” rating. The company is a wind power flange faucet, and the number of bearing products will be released soon. Considering the trend of declining costs in the wind power industry, we lowered the company's profit forecast for 23-24. The estimated net profit for 23-24 was 416 million and 690 million yuan respectively (735 and 921 million yuan respectively before the reduction); the additional profit forecast for 2025 was 900 million yuan. The corresponding EPS was 0.94, 1.56, and 2.04 yuan/share, respectively, and the corresponding PE was 21, 13 and 10 times, respectively. Maintain a “buy” rating.

Risk warning: wind power installation demand falls short of expectations; raw material prices fluctuate; risk of product price fluctuations.