Main points of investment

The company released its semi-annual report for 2023: revenue of 613 million yuan, an increase of 23.17% over the same period last year; net profit of 137 million yuan, an increase of 34.81%; net profit of 128 million yuan, an increase of 35.08% over the same period last year; basic earnings per share of 0.57 yuan per share, an increase of 35.71% over the same period last year; weighted average return on net assets of 6.44%, an increase of 1.15pct over the same period last year.

The revenue growth of the construction machinery business is relatively fast: from a quarterly point of view, the company's 2023Q1 and Q2 realized revenue of 280 million yuan (+ 23.41%, the same below) and 333 million yuan (+ 22.96%), respectively, and the company's 2023Q1 and Q2 realized a net profit of 57 million yuan (+ 51.60%) and 80 million yuan (+ 25.02%), respectively. In terms of products, the revenue generated by the company's 2023H1 contract totaled 613 million yuan, of which compressor components were 373 million yuan, an increase of 10.73 percent over the same period last year, accounting for 60.84 percent of the total income; construction machinery was 175 million yuan, an increase of 46.73 percent over the same period last year, accounting for 28.50 percent of the total income.

Profitability continues to be optimized and expense control is stable, but subsidiaries are dragged down: 2023H1's overall gross profit margin is 37.9%, an increase of 2.3 pct over the same period last year, and net profit is 22.3%, an increase of 1.9pct over the same period last year. From a quarterly point of view, 2023Q1, the company's gross profit margin is 37.4%, year-on-year increase of 3.1pct, month-on-month increase of 0.7pct; net profit rate of 20.2%, year-on-year increase of 3.8pct, month-on-month decrease of 2.0pct. 2023Q2, company gross margin 38.2%, year-on-year increase of 1.5pct, month-on-month increase of 0.9 pct; net profit rate of 24.1%, year-on-year increase of 0.4pct, month-on-month increase of 3.9pct. In terms of period expenses, the total cost of 2023H1 during the period was 72 million yuan, an increase of 30.6% over the same period last year, and the expense rate was 11.7%, an increase of 0.7pct over the same period last year. Of this total, the sales expenses were 6 million yuan, up 27.1% from the same period last year, accounting for 0.96% of the operating income, an increase of 0.03 pct over the same period last year; the management expenses were 42 million yuan, up 38.0% from the same period last year, accounting for 6.79% of the operating income, and an increase in 0.7pct over the same period last year, mainly due to the increase in employees' salaries and share-based payment fees. Financial expenses-9 million yuan,-10 million yuan in the same period in 2022, accounting for-1.42% of operating income, an increase of 0.6 pct over the same period last year; R & D expenses of 33 million yuan, an increase of 9.3% over the same period last year, accounting for 5.39% of operating income, a decrease of 0.7pct over the same period last year. In addition, 2023H1, subsidiaries Zhejiang Mingde and Liyuan Jinhe lost about 3.4433 million yuan and 9.0235 million yuan respectively, which was a drag on the company's performance. With the continuous climbing of subsidiary production capacity, the scale effect appears, and it is expected to improve in the second half of the year.

The net cash flow generated by 2023H1's operating activities was 104 million yuan, an increase of 77.21% over the same period last year, mainly due to the company's good payback and an increase in the recovery of accounts receivable. The net cash flow from investment activities was 156 million yuan, an increase of 38.08% over the same period last year, mainly due to a decrease in cash paid by investment and a decrease in cash outflow from investment activities. The net cash flow from fund-raising activities is-233 million yuan, compared with-40 million yuan in the same period in 2022.

Capacity continues to be released to expand the global layout. The technical renovation project of Liyuan Jinhe, a holding subsidiary, reached production smoothly and formed coordination with Liande shares through the establishment of a new resin sand casting production line. As of June 30, 2023, the company has an annual casting capacity of 70,000 tons, 10 CNC machining workshops and 129 large-scale machining centers. In addition, through the wholly-owned subsidiary Ruixin Industries, the company plans to set up a subsidiary in Mexico to invest in the construction of a Mexican production base, with a total investment of US $56.56 million (of which the registered capital of the Mexican subsidiary is US $10 million). The construction period of the project is two years. After reaching production, it is planned to produce 38000 precision parts per year, including 20,000 compressor parts, 10,000 construction machinery parts and 8000 agricultural machinery parts. It is estimated that the revenue will increase by 29.74 million US dollars per year. The completion of the Mexican base is expected to further enhance the company's deep cooperation with global customers and accelerate the process of internationalization of the company.

We expect the company to achieve a homing net profit of RMB 300,000,438,000,000 in 2023-2025, corresponding to a PE of 21.3 plus 14.6 plus 11.7 times (2023.08.09), maintaining an "overweight" rating.

Risk hint: the expansion of new customers and new areas is not as expected; the overseas economic boom is declining; the release of production capacity is not as expected; the operation of reference and holding companies is not as expected.