The company is a leading safety gate and lock enterprise in China, and the only listed company in the industry. The compound growth rates of revenue and net profit (excluding credit impairment) in 2017-2021 were 12.8% and 2.4%, respectively.
2022 was greatly affected by real estate, and the decline in sales volume+impairment accrual led to pressure on performance.
The concentration of the safety gate industry is low, high steel prices+declining real estate, and brand concentration have accelerated the liquidation of the industry. As an industry leader, the company continues to benefit. In '22, the TOP1 brand in the steel entry category was Wang Li, with a preference rate of 17%. Compared with other consumer building materials TOP1 brands, there is still room for improvement (for example, Dongfang Yuhong's preference rate for waterproof materials is 30%). In the context of high steel prices, declining real estate, and brand concentration, industry clearance is expected to accelerate, and we are optimistic that the market share of leading companies will increase.
Production capacity is expanding rapidly and costs continue to drop. The 23-24 performance is expected to reach an inflection point. The core of the company is its manufacturing advantages: 1) Rapid expansion of production capacity to seize market share. Currently, the company has 3 production bases, including Changtian and Pengxi as new bases, which were put into operation one after another in the second half of '21. Before the new base is put into operation, the company's production capacity will exceed 1.5 million kilowatts; after the new base is put into operation, the company's production capacity is expected to exceed 2.4 million kilowatts, and the company is expected to continue to seize market share. 2) Build industry-leading smart factories to reduce costs and increase efficiency, and gross margin is expected to reach an inflection point. Company Director Tian's investment project is the only smart door lock and smart home manufacturing base in the door and lock industry. It reduces the 34 people required for the original process to 1 person, which can greatly reduce employment, increase production capacity, and shorten the product production cycle. Furthermore, the factory was upgraded one after another in 21-22. As the capacity utilization rate increased, the impact of the consolidation was gradually diluted, thus driving the company's gross margin to increase. We estimate that in 23-24, the unit cost of the company's steel safety gates was -7.1%/-1.8%, and the gross margin was 29.2%/30.5%, respectively, and +4.6/+1.2pct over the previous year. The gross margin is expected to reach an inflection point.
Investment suggestions: We expect the company to achieve net profit of 197/299/337 million yuan in 23-25, corresponding to an EPS of 0.45/0.67/0.76 yuan. As currently the only A-share listed enterprise in the safety gate industry, the company is expected to break through production capacity bottlenecks with the help of financing advantages in the future. With manufacturing advantages, channel advantages, and brand advantages, it will continue to increase its market share ratio, giving the company 23 times the target PE in 23 years, corresponding to a target share price of 10.24 yuan. Covered for the first time, giving it an “increase in holdings” rating.
Risk warning: Real estate recovery fell short of expectations, raw material prices fluctuated sharply, and production capacity release fell short of expectations.