Incident: The company released its 2023 interim report, achieving operating income of 209 million yuan, an increase of 26.01% over the previous year, and net profit attributable to shareholders of listed companies of 32.81 million yuan, an increase of 32.29% over the previous year.

The company is a major domestic supplier of screw drilling tools. The company's predecessor, Deshi Co., Ltd. was restructured and established by the Dezhou Machinery Factory, a subsidiary of Sinopec. Since the mid-80s of the last century, it has been establishing business partnerships with drilling and oil field units under CNPC and Sinopec. The company mainly supplies a variety of drilling tool products, mainly underground power drilling tools (screw drilling tools), and special drilling equipment mainly includes wellhead equipment and drilling equipment. The company's overseas business is developing rapidly. The company is developing rapidly in the North American, Russian, Central and Southeast Asian markets. In the first half of 2023, the company's foreign business achieved a 115% year-on-year increase in revenue. The main business: The sales and leasing business of drilling tool products is growing rapidly. In the first half of this year, the operating income of the company's drilling tools products reached 92.75 million yuan, up 33% year on year, and gross margin reached 49%, up 3% year on year; revenue from leasing and maintenance business reached 59.38 million yuan, up 67% year on year, gross margin reached 37%, up 12% year on year; operating income of equipment products reached 43.33 million yuan, up 13% year on year, and gross margin reached 32%.

The company's fund-raising project is the main business to expand production capacity, and screw drills are expected to become the largest supplier. The high-end wellhead manufacturing project for the company's fund-raising project is expected to be completed within the year. Currently, the project progress has reached 76%. It is expected that 2000 casings and gas extraction trees will be added (units/sets), which will double the original production capacity; the integrated manufacturing and service project of underground intelligent drilling tools for the fund-raising project is expected to add a total of 1870 special motors, near-drill systems, PDC drills, and steering systems, which will increase the original production capacity by 50%.

Profit forecast: International oil prices remain high, and fund-raising projects expand production capacity. We predict that the company's operating income for 2023-2025 will be 620 million yuan, 780 million yuan, and 9.1 billion yuan respectively; net profit to the mother will be 100 million yuan, 126 million yuan, 148 million yuan, and EPS of 0.66/0.84/0.99 yuan respectively. Considering comparable company valuations and company performance growth rates, we gave the company a “buy” rating based on 2023 performance by 35 times PE and a target price of 22 yuan per year.

Risk warning: A sharp decline in international oil prices, delays in the progress of fund-raising projects, etc.