Core views

The company received a 34% revenue increase in 2022 due to various factors such as special events and local financial pressure. Although it fell short of expectations, it was not easy to obtain nearly 900 million dollars in revenue under multiple pressures. The construction materials sector performance that has been announced so far is mostly under pressure, and the company's growth shows a certain amount of α. However, the net profit of the company declined sharply in the first quarter of 2023, dragged down by the pace of delivery, but the amount of new orders increased significantly, indicating the potential for subsequent performance growth. Seismic mitigation rule documents have been issued one after another in various regions, and policy markets are being implemented. The “shock and vibration dual control” functional market has great potential in the future. Market space is expected to expand drastically. Pressure on short-term performance will not change the long-term growth trend, strengthen quality supervision or the way for the healthy development of the industry.

occurrences

The net profit of the mother in 2022 was 100 million yuan, an increase of 14.52% over the previous year. On the evening of April 14, 2023, Zhenan Technology announced its 2022 performance report. According to preliminary accounting data, the company achieved revenue of 888 million yuan (+34%) in 2022 and net profit of 100 million yuan (+14.52%) to the mother.

The first quarter of 2023 achieved net profit of 3.5 million yuan to 5.24 million yuan, a year-on-year decrease of 83.90%-89.25%. On the evening of April 14, 2023, Zhenan Technology announced the performance forecast for the first quarter of 2023. The net profit returned to the mother for the first quarter was 350-524 million yuan, a year-on-year decrease of 83.90%-89.25%, after deducting net profit of 281-4.21 million yuan, a year-on-year decrease of 87.05% -91.36.

Brief review

The pace of delivery was disrupted at the beginning of the year, and delays in delivery led to a decline in performance. Continued impact of public health incidents, workers' vacations in January and February of this year and early shutdowns before the Spring Festival affected the progress of the project. After the Spring Festival, some projects started late, customer demand stagnated for a short period of time, and the overall construction period was reduced by more than 1 month. As a result, the supply requirements of the company's main customers in January and early to mid-February of this year were slow, and individual project customers requested delays in delivery. As a result, the company's delivery pace resumed in March. The overall delivery situation in the first quarter declined significantly compared to the same period last year. This can also be confirmed by the national cement and steel delivery performance from January to January.

Performance is expanding rapidly, and upfront costs are rising. In order to adapt to the rapidly growing market space, the company used 285 million yuan to raise capital to build a new base in Tangshan, Hebei, with an annual output of about 30,000 sets of shock absorption products and 30,000 sets of seismic isolation products; a fixed increase of 250 million yuan will be invested in the first phase of the Changzhou base and the construction of a marketing network, respectively. As of December 31, 2022, the company's new Tangshan base had been completed and accepted, meeting the conditions for commissioning. As the company's ongoing projects were upgraded, depreciation and interest expenses on convertible bonds increased rapidly, which had a great impact on profit indicators.

There has been a decline and an increase, and the number of new orders signed suggests performance potential. Although the company's delivery situation in the first quarter was poor, the company's new orders increased significantly in the first quarter of this year, especially since March. Demand in both the scope of legislation and functional markets increased markedly, and the growth rate of the policy market within the scope of legislation was even more obvious. Market demand has been released, the company actively adapts to market demand, adheres to the “shock and vibration dual control” strategy, increases market development, does order delivery, and continuously improves product competitiveness and operation and management capabilities to ensure steady business growth. The rapid increase in the amount of new orders has laid the potential for higher performance in the later stages.

The legislative market has been implemented at an accelerated pace, but it has not been easy. Strengthening quality supervision or a healthy development path for the industry. On May 12, 2021, the State Council passed the “Regulations on the Administration of Seismic Resistance in Construction Projects”, and local documents such as local standards for earthquake mitigation in Beijing were issued one after another. There are rules to follow in the implementation of earthquake mitigation in various regions, and the speed of implementation of earthquake dampening technology has accelerated. However, the development of the earthquake mitigation industry has not been easy. Lack of effective supervision in some regions and winning bids at low prices have led to low-quality products dominating some markets. China has already entered a stage of high-quality development. The country attaches great importance to the protection of people's lives and safety. The country has passed legislation to promote the use of shock absorption technology in eight types of buildings, including schools and hospitals in high-intensity zones and earthquake-protected areas. As a result, the shock absorption industry has developed rapidly. However, during the development process, due to a lack of effective supervision, especially in small projects, the phenomenon of removing good money from bad money is quite serious. There is still some ignoring national and industry standards. At the same time, winning bids at low prices is also widespread in the industry. At the same time, winning bids at low prices is also widespread in the industry. A “structural safety component” places excessive emphasis on low prices and whether it is in line with China's “high quality” The requirements for “development”? This is debatable. On September 5, 2022, a 6.8 magnitude earthquake occurred in Luding County, Ganzi Prefecture, Sichuan, causing human casualties. Judging from the performance of individual seismic isolation buildings in Luding County, there were some small enterprises where the upper and lower sealing plate top surfaces of low-quality seismic isolation bearings were completely broken. At the same time, they showed great residual deformation. How unqualified products were applied to the project during construction is worth pondering. For structural safety parts, it is very necessary to strengthen supervision and on-site inspection. The industry should try to avoid backfilling as much as possible. Products in the field of structural safety are different from other products. On the anniversary of the 512 Wenchuan earthquake in the field of structural safety, it is easy to spawn low-quality products in disguise. Structural safety is important. Low-quality products or even counterfeit products cannot be tolerated. The Changsha building collapse incident was shocking. On June 1, 2022, a magnitude 6.1 earthquake occurred in Lushan County, Ya'an City, Sichuan, which also caused casualties. On the anniversary of the 512 Wenchuan earthquake in 2022, many structural masters called on structural engineers and project leaders across the country to maintain the bottom line, select good products, and strictly inspect them in the field of structural safety. Therefore, the earthquake mitigation industry should stick to the direct sales model, ensure product quality, and be responsible for the safety of people's lives and property.

The functional market is full of stars and is growing rapidly. The application of vibration damping technology in the field of public buildings has the effect of protecting the safety of people's lives and property. At the same time, it has very high commercial value in the fields of museums, LNG, TOD subway covers, nuclear power equipment, cellar insulation, semiconductor companies, etc., and uses hazardous chemicals, cultural relics, precision instruments, etc. to resist shocks (vibrations) with hazardous chemicals, cultural relics, precision instruments, etc., and is expected to be 10 billion yuan/year after the functional market space matures. The internal market space for superposition policies will expand dramatically.

The company's fundamentals have been improving for a long time. Seismic isolation technology started late in China, but it is developing rapidly. As social structural safety awareness increases, the industry penetration rate will also increase dramatically, and the company's growth is remarkable. Considering adverse effects such as the impact of special events, pressure on local financial investment, and forward corporate expenses, the company's performance is still growing at a high rate. Net profit for 2022-2024 is expected to be 100 million, 205 million, and 405 million yuan respectively, maintaining the “buy” rating.

Risk warning:

1. The implementation of industry policies did not meet the expected risks: The implementation of the “Regulations on the Administration of Seismic Resistance in Construction Projects” has brought about a rapid increase in demand for earthquake mitigation within the scope of legislation, but it will take some time for the Regulations to be implemented, and local supporting policy rules will also be implemented. If the promotion results fall short of expectations, the promotion of seismic isolation technology may slow down.

2. The speed of marketing for functional demand fell short of expectations: shock absorption was promoted and used in eight types of buildings in the two districts and legislation of the Regulations. Functional demand in the fields of TOD, commercial and residential, refurbishment, LNG, nuclear power, precision equipment plants, wine cellars, etc. was also very strong. Frequent earthquakes would accelerate the penetration of shock absorption technology, but the project was affected by macroeconomic sentiment, and there is a risk that functional demand marketing will fall short of expectations.

3. The rise in the price of the company's raw materials affects gross margin risk: The upstream shockproof products are mainly commodities such as steel, rubber, lead ingots, etc., which are greatly affected by economic cycles, exchange rate changes, etc. If the increase in raw material prices exceeds expectations, the company's gross margin will be negatively affected to a certain extent.