Event: the company releases its 2023 half-yearly report. In the first half of the year, the company achieved operating income of 1.235 billion yuan, an increase of 9.82% over the same period last year; net profit of 154 million yuan, an increase of 32.31% over the same period last year; and net profit of 152 million yuan, an increase of 39.68% over the same period last year, with basic earnings per share of 0.46 yuan per share.

The performance in the second quarter dropped slightly from the previous quarter. The company's 2023Q2 realized a net profit of 74 million yuan, down 7.60% from the same period last year, 8.21% from the previous month, and 72 million yuan from the same period last year, down 2.60% from the same period last year and 10.44% from the previous quarter. The company's 2022Q3-2023Q2 sales gross profit margin is 22.03%, 20.20%, 24.45% and 20.70% respectively, and the quarterly net sales profit margin is 13.71%, 11.90%, 13.93% and 10.83% respectively. In the second quarter, the company's sales gross profit margin and net profit margin decreased slightly from the previous quarter, and remained at a normal level as a whole.

The output of power transmission and transformation equipment increased rapidly in the first half of the year, and high-end projects continued to be put into production. The company's 2023H1 achieved 52200 tons of silicon steel production, which was reduced by 3300 tons due to the power outage of the 80, 000-ton high-end magnetic new material project. The output of power transformers reached 5.06 million kVA, an increase of 50.75 percent over the same period last year. 5119 complete sets of electrical equipment, an increase of 5.13 percent over the same period last year, and 656 box-type substations, an increase of 53.99 percent. The 80,000 ton high-end magnetic new material project was partially put into production on June 30, 2023, and it is expected that an additional 20,000 to 30,000 tons will be produced in 2023. Due to the long production cycle of foreign equipment, the project will be fully put into production in June 2024. It is estimated that the output will increase by 50,000 to 60,000 tons in the same year. The first phase of the intelligent complete set of electrical equipment industry base construction project has been put into use, the second phase has completed the construction of the main factory building structure, and reached the scheduled state of use in April 2024. With the release of high magnetic induction products and the introduction of imported equipment, the subsequent output of silicon steel and high-grade output is expected to maintain a high growth trend, while the steady expansion of power transformers, box-type substations and complete sets of electrical equipment in the fund-raising project, the company is expected to rely on traditional business advantages to further improve profitability.

With the advent of the industry business cycle, demand is expected to expand significantly. Benefiting from the annual growth of downstream power installation and the acceleration of power grid construction, the income of transmission and distribution equipment and silicon steel continues to grow, and new coal power installation is expected to increase significantly in the future. 80GW and other policies approved annually from 2022 to 2023 push the thermal power industry into a state of prosperity; in terms of wind power, the average annual installed capacity of wind power in China from 2023 to 2025 is expected to be about 60GW~70GW, which will enter the high boom stage again. At the same time, the global energy transformation and the increase in electricity consumption have led to the demand for power grid construction. The export growth rate of power equipment represented by transformers is rising, which is expected to be good for domestic oriented silicon steel exports. The deepening transformation of the distribution system of the national rural power network will increase the power load and simultaneously increase the capacity of transformers. It is expected that the restart of coal power installation and the high growth of new energy, rural power grid transformation, overseas demand and many other factors are expected to continue to boost the demand for oriented silicon steel and transformers.

Investment advice. The company's silicon steel business continues to expand, products accelerate high-end iteration, transmission and distribution business increases steadily, downstream thermal power restart and the high growth of new energy continues to push up the demand for high-end silicon steel and transformers, and the expansion trend of the whole industry chain is expected to support its higher valuation. We estimate that the company's net profit from 2023 to 2025 will be 360 million yuan, 490 million yuan and 600 million yuan respectively, corresponding to 16.6,12.4,10.0 times of PE, maintaining the "buy" rating.

Risk tips: upstream raw material prices fluctuate sharply, downstream power demand is lower than expected, industry space measurement may have deviation, new production line and business development have uncertainty.