Investment logic
With the expansion of advantages in three major areas, revenue reached a record high in 2017: the company is the leader of heavy machinery in China, with the top domestic and world-class manufacturing capacity and R & D strength of heavy machinery. China's heavy machinery industry has experienced a decade of downturn since the financial crisis in 2008, and the overall trend of the industry has picked up since 2017. the company has shown its advantages in the three downstream areas of petrochemical, steel and nuclear power, and its orders and sales have rebounded significantly. In 2017, the company achieved a revenue of 10.252 billion yuan, an increase of 219.93% over the same period last year, the best level in history; a total profit of 105 million yuan, an increase of 5.652 billion yuan over the same period last year; a new order of 12.25 billion yuan, an increase of 50.9% over the same period last year; a rebate of 12.07 billion yuan, an increase of 50.4% over the same period last year; the company's operating certainty reversed.
Capacity replacement coincides with improved profitability, and the demand for equipment upgrading by steel enterprises is high: China's iron and steel industry has entered a large-scale supply-side reform since 2016, the first half of which mainly focused on long-term "zombie capacity". Since the second half of 2017, the industry reform has entered the deep water area, and capacity replacement has become an important means to achieve the organic combination of strictly prohibited new capacity and structural adjustment. For the whole of 2017, the iron and steel industry eliminated nearly 25 million tons of capacity by way of capacity replacement. Combined with the substantial improvement in the profits of steel enterprises, we judge that the total steel capacity participating in capacity replacement in 2018 will most likely be the same as that in 2017, resulting in continuous equipment procurement demand.
The company's metallurgical equipment revenue and profit has reversed and is expected to increase significantly in 2018: the company's metallurgical equipment orders have increased rapidly since the second half of 2016. New orders totaled 2.036 billion yuan in 2017, 3.378 billion yuan in 2017, and revenue for the whole year of 2016 reached 2.487 billion yuan, an increase of 167.59 percent over the same period last year. In the case of substantial growth in sales, the cost of metallurgical equipment has been diluted, the profitability of the products has improved significantly, and the gross profit margin has returned to double digits, second only to the historical peak of 25.37% in 2008. Combined with the situation in the past two years, we judge that the company's metallurgical equipment orders are still abundant, and under the overall efficiency requirements of iron and steel production capacity, the company's metallurgical equipment sales are expected to maintain a high boom this year and next year.
Valuation and investment advice
We judge that the company is expected to pick up with a number of downstream demand and start a high boom cycle of more than three years. We estimate that in 2018-2020, the company is expected to achieve a revenue of 123.16xpx 145.39x15,234 million, and a net profit of 4.43x1034xt 1.158 billion, compared with the same period of last year, + 426.02% Placement 133.51% gamma 11.98%; diluted EPS0.065/0.151/0.169 RMB. We maintain the company's "buy" rating, with a target price of 5 yuan per share for 6-12 months, and the current stock price corresponds to 59X18PE and 25X19PE.
Risk
The replacement of steel production capacity ended ahead of schedule; steel prices fell sharply and depressed the profits of downstream enterprises.
