The leading copper pipe company with a global layout has a copper pipe production capacity of nearly 800,000 tons, and the long-term plan is to increase it to 1.31 million tons. Hailiang Co., Ltd. has 21 production bases around the world, with a production capacity of nearly 800,000 tons of copper pipes, accounting for more than 20% of the domestic market. It is one of the largest and most competitive copper tube processing enterprises in the world. Its domestic market share has maintained steady development over recent years, and its scale advantage is significantly ahead of its peers. The core business of Hailiang Co., Ltd. mainly includes copper pipes, copper bars and copper bars. Copper pipes are the dominant product, accounting for 65% of production capacity and more than 70% of gross profit. Copper pipes are mainly used in air conditioning and refrigerator refrigeration, construction water pipes, equipment manufacturing, automobile industry, ship and marine engineering, seawater desalination and other industries.

The scale effect is expected to enter a positive cycle, and it is expected that the leading position of copper pipes will rise to the next level. In the past, low cost and scale increased the company's profitability. As an industry leader, it also had financial strength and technical strength to transform and expand production, and the scale effect is expected to enter a positive cycle. The scale effect of the copper pipe industry is obvious. The greater the production capacity of a single line, the lower the investment intensity and cost per unit of output. The fifth-generation continuous casting and rolling precision copper pipe production line independently developed by the company is currently at the highest level in the industry. The completion rate has increased from 91% to 93%, the comprehensive energy consumption per unit of product has been reduced by 300 kWh, labor efficiency has increased 3 times, and the comprehensive cost has been reduced by 700 yuan/ton. The company has planned to eliminate, modify and upgrade the existing copper pipe production line in batches to the fifth-generation production line standard by the end of 2024. After that, the scale of basically all production lines will reach more than 40,000 tons, significantly increasing the scale of single-line production. The company plans to increase its precision copper tube production capacity from 799,000 tons to 1.31 million tons. The market share is expected to rise to 33%, and the leading position is expected to reach a new level.

After more than ten years of “scuffle” in the copper tube industry, the competitive environment in the industry continues to improve. At the beginning of the 21st century, Chinese enterprises achieved breakthroughs and rapidly surpassed copper tube technology, and domestic copper tube production capacity was oversupplied for a long time.

After more than ten years of “scuffle”, the market pattern has basically stabilized. By 2021, the market share of the top five companies in the copper tube industry had reached 50%, and the industry entered a pattern of monopoly competition. Currently, new production capacity in the industry is slowing down, and project investment is more biased towards technology, equipment and product upgrades. Moreover, the operating rate of large enterprises is significantly higher than that of small and medium-sized enterprises. Starting after the 2020 epidemic, the difference between the capacity utilization rate of large enterprises and the capacity utilization rate of small enterprises continued to widen, and it is expected that the production capacity of large enterprises will expand further in the future; production is difficult to guarantee in the harsh market environment, which is expected to accelerate the elimination of backward production capacity and accelerate the increase in industry concentration.

Hailiang Co., Ltd.'s copper foil production line was quickly put into operation. It has industry-leading management experience, intelligent manufacturing experience, and cost side advantages such as low investment intensity in domestic equipment and lower electricity prices in the Lanzhou New Area. Hailiang Co., Ltd. is expected to replicate the path of leading copper pipes. The company announced its entry into the copper foil processing industry at the end of 2021. It plans to build a high-performance copper foil material project with an annual output of 150,000 tons in Lanzhou New Area. Construction will begin in December 2021, trial production in June 2022, and the first phase of September 2022 will start production of 12,500 tons in one step. The total construction period is only 10 months, which is significantly faster than the industry average. It is expected that the production capacity of the first phase of 50,000 tons of high-performance lithium battery copper foil will be fully put into operation in the first half of 2023. Customers such as Honeycomb Energy, Polyfluoride, Lan Jun, Penghui, and Anchi have already passed factory audits to achieve batch delivery; Ningde Times, BYD, etc. are expected to achieve batch supply in the second quarter of 2023. In terms of cost, (1) Hailiang Co., Ltd. uses all domestically produced cathode rollers. The investment intensity is significantly lower than that of lithium battery copper foil manufacturers that use imported cathode rollers, and is expected to have obvious low cost competitiveness after production is put into operation. (2) The energy consumption in the electrolytic copper foil production process is high. The electricity consumption per ton is about 8,000-9,000 degrees. The copper foil project is located in Lanzhou New Area. The electricity cost for large industries is only 0.35 yuan/kWh. It is estimated that the electricity cost per ton will be reduced by 1360-1,530 yuan compared to peers. Recently, in line with the expansion of the overseas lithium battery industry chain and the major trend of Chinese battery companies going overseas, the company drew on the experience and market resources of the international copper tube market to implement differentiated competition, and plans to invest in the construction of a high-performance electrolytic copper foil project with an annual output of 100,000 tons in Indonesia. The core competitiveness of the copper tube and copper foil industry lies in scale effects, cost advantages, fine management, and the ability to continuously iterate and upgrade itself. Hailiang Co., Ltd. is expected to replicate its mature cost control experience and intelligent manufacturing advantages into the lithium battery copper foil business, opening up a second growth curve.

Profit forecasts, valuations and investment suggestions: We believe that while mastering industry-leading copper tube production technology, Hailiang Co., Ltd. benefits from obvious scale effects. It is expected that the strong will be strong in the copper tube industry and achieve larger scale and lower costs through systematic technical reform. On the other hand, Hailiang Co., Ltd. is accelerating its entry into the lithium battery copper foil industry. In the increasingly intense copper foil industry, it has outstanding electricity price advantages and equipment cost advantages. It is expected to replicate the growth path of leading copper pipes and open up a second growth curve in the copper foil industry. We expect Hailiang Co., Ltd. to achieve operating income of 67.478 billion yuan, 80,931 billion yuan, and 96.953 billion yuan in 2022-2024, up 6.4%, 19.9% and 19.8% over the previous year; net profit of Guimu was 1,136 billion yuan, 1,742 million yuan, 2,660 million yuan, an increase of 2.6%, 53.2% and 52.7% over the previous year. The industry average valuation was selected as 17 times the company's reasonable valuation. The corresponding market value in 2023 was 29.6 billion yuan, and the target price was 14.91 yuan. There is 28% room compared to the current market capitalization and stock price. It was covered for the first time and given a “recommended” rating.

Risk warning: (1) the risk of an overseas recession; (2) the growth of the new energy industry seriously fell short of expectations; (3) the recovery of domestic real estate fell short of expectations.