The company's 23H1 performance is in line with expectations, 23Q2 performance has significantly improved, and profitability continues to pick up. Under the background of accelerating clearance of backward production capacity, it is optimistic that the company, as the benchmark of domestic foundry enterprises, based on the three main businesses, increase machining capacity and achieve the extension of upstream and downstream industrial chains. In the medium and long term, the company has sufficient technical reserves of products and a solid customer base, which is expected to extend the product value chain vertically and expand the new momentum of growth horizontally. We estimate that the company's revenue and net profit in 2023-2025 will be 9.7% and 26% respectively. We will give the company 17 times PE in 2023, maintain the target price of 15 yuan, and maintain the "buy" rating.

The 23H1 performance is in line with expectations, and the 23Q2 performance has improved significantly. The company's 23H1 realized revenue of 1.535 billion yuan (YoY-12.1%) and net profit of 176 million yuan (YoY-2.0%). In terms of quarters, 23Q1 and 23Q2 achieved revenue of 761 million yuan (YoY-14.0%) and 774 million yuan (YoY-10.1%) respectively, and net profit of 77 million yuan (YoY-23.6%) and 100 million yuan (YoY+25.3%) respectively.

In terms of products, the revenue structure of 23H1 has changed: first, the revenue of compressor parts is 812 million yuan (YoY+3.4%), and the gross profit margin is 28.8% (compared with + 5.01pcts in 2022); second, the revenue of construction machinery parts is 300 million yuan (YoY-21.8%), and the gross profit margin is 15.9% (compared to 2022-0.29pct). Third, the revenue of auto parts is 293 million yuan (YoY+19.2%), with a gross profit margin of 20.4% (compared to 2022-2.39pcts); fourth, pig iron and renewable resources achieve revenue of 70 million yuan (YoY-73.9%), with a gross profit margin of-2.47% (compared with + 2.13pcts for the whole of 2022).

The increase in gross margin on compressor parts and the contraction of low gross margin businesses such as pig iron and renewable resources have driven the company's 23H1 gross margin to 23.4% (compared with + 4.56pcts for the whole of 2022). The company has made a large impairment of inventory and goodwill in 2022, and its performance in the first two quarters of 2023 is in the process of improving month-on-month and is expected to pick up quarter by quarter.

Extend the product value chain vertically and expand the new momentum of growth horizontally. (1) through the gradual commissioning of the two investment projects of "IPO+ Convertible Bond", the company is expected to achieve 100% machining of compressor parts and parts, and continue to improve profitability. In 2022, the company further extended the product processing industry chain and completed the technological breakthrough and market development of the "compressor pump movement assembly" process, which not only achieved a breakthrough in the assembly process from "0" to "1" within the company. it is also the first in the industry to open up a supply model of "parts delivery". According to its mid-2023 report, the company will continue to improve the delivery capacity of processed parts and assemblies in the future. (2) 23H1 continues to expand horizontally and successfully enters the washing machine parts supplier system to enhance the diversification of product categories; in the steam zero field, the company has also completed the small batch delivery and verification of a number of "lightweight material castings", and will continue to carry out product development and market development in the second half of the year. According to the company announcement, the company has established school-enterprise cooperation with universities such as Taiyuan University of Technology to start the research and development of magnesium-aluminum alloy, titanium alloy and other material products, and deepen the company's product diversification development strategy.

The controlling shareholders plan to subscribe in full, demonstrating the company's confidence in the development of the company. According to the prospectus for issuing stocks and securities to specific targets (application draft) issued by the company on August 7, 2023, the company intends to issue no more than 36.63 million shares to the controlling shareholder Huaxiang Industries at a price of 8.19 yuan per share. the total amount of funds raised will not exceed 300 million yuan, which will all be used to replenish working capital and repay bank loans. The controlling shareholder plans to subscribe in full, which demonstrates the confidence in the future development of the company.

The company's revenue is expected to continue to benefit from the increase in industry concentration and the steady growth in downstream demand of the three core businesses. The production capacity of the global casting market is stable, and China's share of production continues to rise; under the supply-side structural adjustment, the clearance of backward production capacity is accelerated, and the market share of head enterprises is expected to increase. The prosperity of China's white goods market is improving. According to the National Bureau of Statistics, the cumulative output of 23H1 air conditioners in China reached 140.599 million, an increase of 16.6% over the same period last year. The National Oceanic and Atmospheric Administration (NOAA) estimates that 2023 is likely to be the hottest year on record, and hot weather is expected to keep global air-conditioning sales high. Overseas construction machinery sales are expected to maintain a moderate recovery trend as a whole, and Off-Highway Research expects construction machinery sales in other regions of the world except China to have a CAGR of 2.55% from 2021 to 2026. The growth rate of China's auto parts industry is higher than that of China's whole vehicle industry. According to the data of China Automobile Association, the sales income of auto parts in China increased from 3.46 trillion yuan to 4.9 trillion yuan from 2016 to 2021, with a CAGR of 7.0%. We expect revenue to continue to benefit from increased industry concentration and steady growth in downstream areas.

Risk factors: the risk of deterioration of the macroeconomic environment; the risk of intensified market competition; the risk of fluctuations in raw material prices; the risk of large changes in exchange rates; the risk that the implementation progress or effect of the company's fund-raising projects is not as good as expected; the growth of downstream demand is not as expected.

Investment suggestion: under the background of accelerating clearance of backward production capacity, we are optimistic that the company, as the benchmark of domestic foundry enterprises, is based on the three main businesses, increase machining capacity and realize the extended development of upstream and downstream industrial chains. In the medium and long term, the company has sufficient technical reserves of products and a solid customer base, which is expected to extend the product value chain vertically and expand the new momentum of growth horizontally. Due to the fact that the company's pig iron business has not yet turned into profit and the company's construction machinery parts business has been under pressure since 2023, we have adjusted the company's EPS forecast for 2023-2025 to 0.87 shock 1.05 pound 1.21 yuan (the original forecast value is 0.91 pound 1.08 pound 1.25 yuan). We expect the company's revenue and net profit CAGR to be 9.7% and 26% respectively from 2023 to 2025. Comparable companies Hengrun shares, Liande shares, Mingzhi Technology 2023 Wind consensus expected average PE of about 25x. Considering that the comparable company is more involved in wind power, photovoltaic and other popular tracks, while the company is mainly engaged in traditional fields, it will give the company 17 times PE in 2023, maintain the target price of 15 yuan and maintain its "buy" rating.