Main points of investment:
Huaxiang Co., Ltd. is a comprehensive leader in the foundry industry, "compressor parts" individual champion. The company has a cross-industry, multi-variety of product batch production capacity, deep ploughing compressor parts, construction machinery parts, auto parts and other sub-fields. Among them, the revenue contribution of compressor parts is the highest, with more than 40% from 2018 to 2021. The company's profitability has improved steadily. From 2017 to 2021, the annual compound growth rate of homed net profit is nearly 29%, and the net interest rate has increased from 7.0% in 2017 to 9.8% in the first half of 2022.
The company has a high degree of scale and will benefit from the increase in industry concentration. Since 2019, the three ministries have jointly issued the notice on the prohibition of new foundry capacity in key areas, and the production capacity of the foundry industry will no longer be increased.
Under the background of stricter environmental protection, shortage of energy, rising prices of raw materials and slower growth of downstream demand, the reform on the supply side of the industry has accelerated, and small and medium-sized manufacturers have gradually withdrawn. The company has an annual production capacity of 300000 tons, ranking in the first echelon of the industry and will benefit from the increase of industry concentration.
The extension of the machining industry chain helps to improve profitability. IPO, convertible bond fundraising for compressor parts, auto parts machining capacity expansion, industrial chain extension to increase the added value of products, driving the segment of business gross profit margin. With the refinement of the division of labor in the industrial chain, the company still has room for growth in the machining business by virtue of its leading technology and cost advantages.
We will take various measures to create cost advantages and fully ensure energy supply. The foundry industry is a high energy consumption industry, with electricity charges accounting for more than 10% of operating costs in 2018-2020. By virtue of regional advantages, the company has sufficient power supply, and 20Q4 enjoys a preferential electricity price of 0.3 yuan per kilowatt-hour per year, a decline of nearly 30%. At the same time, the company's acquisition of Jinyuan Industry, on the one hand to ensure pig iron supply, on the other hand through short-process production to save production costs, in addition, lean operations, including customer lines, category management, etc., also significantly improve production costs.
Active layout of photovoltaic, photovoltaic support is expected to reach production in the second half of the year. In February 2022, the company signed a framework cooperation agreement with Hongdong County Government and Xinjiang New Energy Co., Ltd., a special substation electrician, to build Hongdong County 1GW photovoltaic power generation project and photovoltaic support production project with a total investment of 4.3 billion yuan. According to the company's semi-annual report of 2022, the company is actively applying for land and energy indicators, and the photovoltaic support production project is expected to reach production in the second half of the year. Photovoltaic power generation or further reduce the company's electricity costs.
Profit forecast, valuation analysis and investment advice: the net profit of the company from 2022 to 2024 is expected to return to the parent company of RMB 4.1 million, an increase of 26.3%, 40.5%, 24.4%, EPS of 0.95, 1.33, 1.66, corresponding to the closing price of 14.48 yuan on September 27, and PE of 15.3, 10.9, 8.7 times, maintaining the "Buy-A" rating.
Risk hints: the risk of raw material price fluctuations; the risk of large fluctuations in energy prices; the risk of increased market competition; the risk of the impact of the epidemic exceeding expectations; the risk of international trade frictions; the risk of exchange rate fluctuations.