Leading company for high voltage transmission line insulators

The company is the first domestic enterprise engaged in the manufacture of line insulators. It has an absolute advantage in the large tonnage and high voltage grade markets, and has received many honorary titles such as the Grand Prize and First Prize of the National Science and Technology Progress Award issued by the State Council. The production capacity and output of porcelain insulators for transmission lines of the company ranked first in the industry, accounting for about 30%. In previous tenders on the State Grid, the company ranked first in the number and amount of bids won for porcelain insulators in the industry, accounting for more than 30% of the winning bid amount. This year, the company launched products for electrified railways, and is expected to complete CRCC certification in October, laying a solid foundation for the company to enter electrified railways. The company's net profit in the first half of the year increased 4.3 times over the same period last year. Harvest Fund, Central Huijin, and Bosch Fund were all investors in the company.

Revenue/net profit surged in the first half of the year, and profitability increased significantly

In the first half of the year, the company's revenue was 375 million yuan, an increase of 106.28% over the previous year, and Guimu's net profit was 44 million yuan, an increase of 426.88% over the previous year. In terms of products, revenue from suspended porcelain insulators and electric porcelain from power plants has increased dramatically. In terms of market development, products have entered nearly 50 countries and regions, including Pakistan and Iran. In terms of profitability, the company's gross margin increased by nearly 10 percentage points over the same period last year due to falling prices for raw materials such as steel and gas. Operating activities generated 47.69 million yuan in cash flow in the first half of the year, an increase of 6.67% over the same period last year.

Comparable analysis of listed companies, performance growth and gross margin are leading, but valuations are relatively low

Compared with listed companies in the industry, the company's revenue and net profit growth rate in the first half of the year far surpassed that of other companies, and gross margin and net profit were also leading in the industry, far exceeding the sector average, but the company's current valuation is low, or even lower than the sector average.

UHV construction ushered in a peak period, dividends continued to be released, and the company's performance was flexible

According to the State Grid Plan, at least 700 billion yuan will be invested in UHV construction during the “13th Five-Year Plan” period. According to past experience, insulators accounted for about 2% of UHV investment. Based on this calculation, the market size of insulators during the “13th Five-Year Plan” period was 14 billion yuan, and the market space was large enough. As a leading company in the insulator segment, the company's performance is highly flexible.

Controllers have changed, and expectations for epitaxial transformation have strengthened

This year, the actual controller of the company changed. The new controller owns a number of rare earth reserves, separation, processing, and magnetic material production assets, and expectations for future restructuring of the company's main business have been strengthened.

Equity incentives further enhance profitability

Last year, the company issued its first restricted equity incentive, and granted 4 million restricted shares to 32 management and core technical personnel at a price of 5.67 yuan/share. The unlocking conditions were that net profit in 2015, 2016, and 2017 increased 60%, 70%, and 80% over 2014. According to the results of the first half of the year, reaching the unlocking conditions this year is a probable event.

Profit Forecasts and Investment Ratings

The average price-earnings ratio of cable components in the SW grade 3 sub-sector where the company is located is 64.81 times. Considering the company's rapid growth in performance and UHV construction exceeding expectations, we believe that the company's reasonable valuation is 75-80 times PE valuation. According to the 2016 EPS performance forecast, the corresponding reasonable stock price is 35.93-38.32 yuan/share, giving the company an investment rating of “increasing holdings”.