Brief performance review
*ST once disclosed that in its 2017 annual report and 2018 quarterly report, the company achieved revenue of 10.252 billion yuan for the full year of 2017, +219.93%, the highest level in history; the mother's net profit was 84 million yuan, successfully reversing losses and will be removed. The company 2018Q1 achieved revenue of 2,797 million yuan, +75.26% year on year; the net profit of the parent company was 27 million yuan, +352.16% year on year, the highest profit in the first quarter after 2010.
Management analysis
Industry sentiment has been driven by order, and the company's performance has improved dramatically: the company's main products include complete metallurgical equipment, nuclear energy equipment, heavy pressure vessel equipment, large-scale castings and forgings, etc. Downstream covers the lifeblood of the national economy, such as steel and metallurgy, nuclear power, petrochemicals, hydropower, thermal power, etc. In 2017, the company's revenue more than tripled year-on-year, the highest in history; profit increased 5.652 billion yuan year-on-year; orders were added 12.25 billion yuan throughout the year, an increase of 50.9% over the previous year; the company's performance began a large-scale reversal, confirming a sharp recovery in industry sentiment from all sides.
The reversal in performance stemmed from a recovery in downstream demand: since 2017, steel supply-side reforms have boosted demand for equipment upgrades. The company's metallurgical equipment revenue and gross margin increased sharply by 168% and 74.88ppt, respectively, reversing the loss situation of the past two years; domestic third-generation nuclear power reactors have made breakthrough progress, and the company's revenue from the nuclear power sector has increased dramatically; several large-scale refining and chemical integration projects have been built, and the company's heavy pressure vessel revenue has increased fivefold over the same period last year. In addition, the revenue from large-scale casting and forging business, mainly in the downstream power industry, also increased +22% year on year. We determined that the main reason was the opening of procurement for large-scale hydropower plants and maintenance and replacement requirements for thermal power plants.
The industry reversal is sustainable, and we are optimistic that the leaders will benefit: we judge that this round of recovery in the heavy machinery industry is sustainable. In December 2017, the Ministry of Industry and Information Technology issued the “Implementation Measures for Production Capacity Replacement in the Steel Industry”. Steel capacity replacement work will continue to advance in the second half of the “13th Five-Year Plan”; starting this year, construction of third-generation nuclear reactors in China has progressed one after another, and the National Energy Administration proposed “starting construction of 6-8 third-generation nuclear power units every year”
Planning; in addition, the total planned investment of China's refining and chemical projects during the “13th Five-Year Plan” period exceeded trillion dollars. The scale far exceeds that of the past, and they will be implemented centrally over the next three years. Changes in various downstream industries will focus on driving the overall demand for heavy machinery, and the company, as the top seven heavy machines in China, is expected to benefit to the greatest extent. The company's development expenditure balance at the end of 2017 exceeded 100 million yuan, a threefold increase over the previous year; the annual fixed asset investment actually exceeded 1 billion yuan, of which the large-scale petrochemical container manufacturing base project completed an investment of 3.7 billion yuan, laying the foundation for sustainable development.
Profit adjustments and investment advice
We expect the company to achieve revenue of 123.16/145.39/15.234 billion yuan in 2018-2020, and net profit of 4.43/10.34/1,158 billion yuan, compared with +426.02%/133.51%/11.98% year on year. We believe that the steady improvement in the company's performance is sustainable. The rating was raised to “buy”, and the target price was raised to 5 yuan/share.
Risk warning
Industry competition has intensified; international oil prices have fluctuated greatly; expectations for China's nuclear power reconstruction process are low; nuclear spills, etc.