Manufacturer of mechanical basic parts with outstanding profitability. The company is one of the leading manufacturers of industrial gears in China, and ranks first in the market with a share of about 10% in metallurgical gearboxes. Compared with many enterprises in the machinery industry, the company's profitability is more outstanding, the company's gross profit margin in the past three years has been maintained at about 33%, far higher than the industry's gross profit level of about 20%. The reason is that the unique cost control ability of private enterprises, strong product optimization design ability, and high self-control ability of key components make the company lead the industry in terms of profitability.

The first quarter performance is at a low ebb, and the follow-up performance will gradually pick up. The relocation costs caused by the relocation of large heavy-duty gear production lines in the first quarter, as well as the decrease in the capitalization rate of financial expenses after the completion of the IPO project, led to a significant increase in management costs and financial costs (up to 59 per cent and 268 per cent respectively in the same period), which greatly affected the performance. In the next few quarters of 10 years, some of the expenses will be gradually reduced, and the expense rate will return to the normal level. At the same time, because most of the revenue determined by the company in the first quarter was orders in the fourth quarter of 2009, and because the order prices were relatively low in the industry trough last year, it also affected the level of revenue growth in the first quarter. Over the past 10 years, with the recovery of the overall industry, the order price level of the company has recovered relatively quickly, so the company's future revenue will continue to grow rapidly.

The goal of expanding production of modular deceleration motors is to replace high-end foreign brands. Modular deceleration motor has always been one of the company's leading products, which is in a leading position in the technical level. However, foreign brands SEW and Flender account for a large share in the high-end market (these two companies have production bases in China and their sales volume is about 8 times that of the company). The company's products are basically at the same level as them in terms of technology, but the price is more than 20% cheaper than them, so the company's products have obvious advantages. However, as the company's business capacity has been small, so it has not made great efforts to expand larger customers. At the same time, even after the company expands production, the level of production capacity is still lower than that of the above two foreign-funded enterprises, so we think that the investment feasibility of the company's additional issuance and expansion project is higher.

Wind power gearbox is still a tight product. Although the wind power investment in the next two years has declined compared with the previous two years, and the wind power mainframe industry has more overcapacity, we believe that the wind power gearbox business raised by the company still has a good prospect. First of all, as one of the core components of wind power mainframe, the production capacity of wind power gearbox industry is still small. At present, only three leading enterprises in the industry, Nangao Gear, Chongqing Gear and Hangzhou forward Gear, have a production capacity of more than 1,000 units (3000, 1000 and 1000 respectively, with a total market share of more than 70%), while the production capacity of other enterprises is still small. And due to the high technical barriers to large gears, the enterprises to be entered are also the leaders of the machinery industry (Erzhong, too heavy, Dalian heavy Industry, Inner Mongolia first Machinery Group, etc.), these enterprises all have stable main business, so the expansion speed of wind power gears is relatively stable. According to a rough estimate, the annual demand of wind turbine will reach 11300MW by 2012. according to the average wind gearbox 1.0MW, the capacity of wind gearbox industry is still short.

Investment strategy. We expect the company's 10-year and 11-year revenue to grow by 30% and 40% respectively, with earnings per share of 0.57 and 0.83 yuan (undiluted), respectively, and corresponding dynamic PE of 26 and 18.

Times. At present, the valuation of the company is already at a low level among small and medium-sized board machinery enterprises, with a high margin of safety, and the company is still in a period of rapid growth in the next two years, so we give the company a "buy" rating for the first time.

Risk hint: the continued tightening of macro policies has led to a serious decline in investment, and investment in the metallurgical industry continues to shrink.