Revenue increased 69% and performance increased 86% in 2019
The company released its 2019 annual report, achieving revenue of 1,618 million yuan, +68.88% year-on-year; net profit of 59 million yuan, +85.91% year-on-year, after deducting non-return net profit of 57 million yuan, +96.16% year-on-year.
The sharp increase in the company's revenue was mainly due to the sharp rise in product volume and price. Sales volume and average sales price increased by 52.65% and 16.04%, respectively. The company's gross margine/net margin was 20.42%/3.7%, a year-on-year change of 1.68/0.43 pct. The company's sales/management/R&D/financial expenses ratio was 7.36%/1.65%/3.4%/2.77%, respectively, with a year-on-year change of 0.62/-0.33/-0.05/-0.61 pct.
The reason for the increase in the company's sales expenses is the expansion of the business scale and sales radius, which has led to an increase in expenses such as freight and handling charges.
Focusing on the tower business, benefiting from the national UHV grid construction cycle and increased industry concentration, the company's main business includes sales of angle steel towers, steel pipe towers and substation structures for transmission lines including high voltage and UHV. In 2019, the main product production/sales volume was 20.95/201,600 tons, with a year-on-year ratio of +56.06%/52.65%, a record high. By business, the company achieved revenue of 948/444/104 million yuan for angle steel towers/steel pipe towers/other steel structure products in 2019, +57.91%/76.62%/384.97% over the same period. Of these, UHV transmission above 1000 KV mainly uses steel tube towers. Judging from the industry situation, the State Grid publicly stated that the investment scale of UHV construction projects for the full year of 2020 will reach 181.1 billion yuan, which can drive social investment of 360 billion yuan. The overall scale is nearly 541.1 billion yuan. UHV will reach a peak in construction, and the company is expected to benefit as the top three listed tower companies. Judging from the competitive pattern, the concentration of the tower industry is increasing year by year, and the Matthew effect is remarkable. According to the National Grid bid data, the market share of the top ten successful bidders increased from 25% in 2017 to 35% in 2019. The company is a qualified supplier to the three major power grid giants State Grid, China Southern Power Grid, and Inner Mongolia Power Grid. In 2019, it won the bid for 98,000 tons (ranked 7th), and the Inner Mongolia Power Grid won a bid of 0.77 million tons (ranked 4th), occupying an advantageous position.
Profit forecasts and investment recommendations:
The company is a tower enterprise ranked in the top three listed companies and focuses on its main business. Currently, it is in a downward cycle in steel prices, and the company is fully benefiting from the country's UHV construction. Profit elasticity is high. We expect net profit to be 1.73/2.21/270 million yuan in 2020-22, corresponding to 15/12/10 times PE. The first coverage gives a “buy” rating.
Risk warning: UHV construction falls short of expectations; steel prices have risen sharply; industry competition has intensified.