1H23 performance is in line with our expectations

The company announced 1H23 results: revenue 1.981 billion yuan, year-on-year + 57.53%; return to the mother net profit 298 million yuan, year-on-year + 30.04%; deduction of non-net profit 275 million yuan, year-on-year + 25.10%, the company's performance is in line with our expectations. In a single quarter, 2Q23's revenue was 1.038 billion yuan, year-on-year + 60.55%, month-on-month + 9.98%; net profit returned to its mother was 155 million yuan, year-on-year + 27.09%, month-on-month + 7.95%.

Trend of development

The main business maintained rapid growth, and the gross profit margin of aerospace forgings increased slightly. 1) during the reporting period, the company's revenue from aerospace forgings / petrochemical forgings / electric forgings respectively reached 679 million yuan, an increase of 20.03%, 69.30% and 297.04% respectively over the same period last year. The downstream orders for various types of forgings were full, and revenue maintained rapid growth. 2) 1H23 gross profit margin / net profit margin year-on-year-0.26ppt/-3.18ppt to 26.72% 0.26ppt/-3.18ppt 15.05%, by product, aerospace forgings / petrochemical forgings / electric forgings gross profit margin year-on-year + 3.50/-0.31/+24.89ppt to 48.0% picks 17.8% picks 18.7%. The decline in overall gross profit margin is mainly due to the increase in revenue share of electric forgings with lower gross profit margin. The decline in net interest rate was mainly due to a sharp decline in other income.

During this period, the cost control is good, and the decline in VAT-exempt income disturbs the net profit level. 1) the period expense rate of 1H23 is from-0.45ppt to 7.34% compared with the same period last year, and the expenses are well controlled during the period, in which the management expense rate and financial expense rate are respectively year-on-year-0.35ppt/-0.42ppt, mainly due to the increase in economies of scale and exchange gains and losses. 2) the company's other income is from-81.69% to 7 million yuan compared with the same period last year, mainly due to the exemption of products from VAT and the reduction of government subsidies. 3) the company's 1H23 inventory / contract liabilities increased by 6.1% to 953 million yuan by 44.4% compared with the end of 2022, suggesting that the pace of stock preparation and production preparation is still tight.

Private suppliers of high-end ring forgings plan to issue convertible bonds to expand forging production capacity and expand precision processing business downstream. 1) the company has ploughed the ring forging business for more than ten years, and has been recognized by GE, Luo Luo, Vestas and other high-quality customers, leading the industry in the level of technical equipment and organizational management efficiency. 2) after raising 1.6 billion yuan in October 2022 to expand production, the company announced again on April 26, 2023 that it intends to issue convertible bonds to raise 1.95 billion yuan for the construction of aerospace precision ring forging intelligent production line and parts precision processing project. We believe that the company's expansion of aerospace forgings production capacity is expected to continue to enhance large-scale production capacity, downstream extension of the business chain layout precision processing business is expected to further enhance the company's core.

Profit forecast and valuation

We keep our 2023Universe earnings forecast unchanged, and the current share price corresponds to the price-to-earnings ratio of 17.9 times 2024 earnings for 2023Universe. Due to the recent downward valuation center of the sector, we have lowered our target price by 22.7% to 124.97 yuan, corresponding to a potential 31% increase of 23.5 times earnings in 2024.

Risk

1) the risk of product price reduction; 2) the product delivery is not as expected.