Event: On August 22, 2023, the company released its semi-annual report for 2023: revenue for the first half of 2023 was 785 million yuan, yoy +4.3%, net profit of 60.18 million yuan, yoy -11.0%; 2023Q2 revenue was 44.08 million yuan, yoy +5.8%, net profit of 34.52 million yuan, yoy -14.4%.

Comment:

The 2023H1 performance was in line with expectations, and the growth rate of the vehicle chain was impressive. In a situation where overseas downstream demand was weak, the company recorded an overall increase in revenue and a slight decline in profit. By region, domestic revenue was 470 million yuan, yoy +15.5%, foreign revenue was 315 million yuan, yoy -8.8%; by product, the company's vehicle chain/agricultural machinery chain/industrial chain/other revenue in the first half of 2023 was 59%/17%/16%/8%, and the revenue share distribution for the same period 2022 was 49%/21%/21%/8%. The main reason for the structural change was the high vehicle chain growth rate, reaching 25%. Due to stable raw material prices, the company's overall gross margin of 2023H1 reached 23.1%, up 1.45 pct from the same period last year. Among them, the vehicle chain/agricultural machinery chain/industrial chain were 24.9%/29.0%/20.7%, respectively.

A highly specialized, new, and small giant, with strong ability to withstand extensive downstream pressure. As an invisible champion in the industry, the company has been awarded a specialized, new, and small giant; it is widely downstream, which frees the company from dependence on the prosperity of a specific industry; in the future, the company will rely on the competitive position and good brand status of the existing motorcycle chain, actively explore the post-market market, find opportunities to accompany OEMs to go overseas to carry out pre-assembly packages; the automobile chain empowers Shanghai Hantong to increase the income of its high-value-added engine chain product portfolio; agricultural machinery chain development categories, and the industrial chain actively explores usage scenarios. At the same time, the current market is strengthening the import substitution of core components. Combined with the fact that the company's products essentially have strong “consumables” attributes, it is expected that they will continue to maintain strong competitiveness.

There is a large market space for high-end motorcycles, and we are waiting for the expansion of new production capacity to be implemented. Consumption upgrades are driving a wave of purchases of high-displacement motorcycles as personalized consumer goods. At the same time, the global motorcycle boom is picking up, the aftermarket capacity is large, and the motorcycle chain market is vast. The company passed the “Zhenghe Chain Transmission Co., Ltd. Production Capacity Expansion Project” bill in 2022. The corresponding products of the project are motorcycle chain systems such as high-end motorcycle chains, high-displacement motorcycle chains, and high-end motorcycle sprockets. We believe that the company's high-end motorcycle chain revenue is expected to continue to grow as production capacity is implemented.

Profit prediction and investment rating: Zhenghe Industrial's main business includes three categories: vehicle chain systems, agricultural machinery chain systems, and industrial equipment chains. Benefiting from improved process standards, rich product categories, rising downstream prosperity, and continuous customer development, etc., the company's performance is expected to continue to grow. We expect the company's revenue for 2023-2025 to be 1,702/2178/2,809 million yuan, up 6%/28%/29% year on year; net profit for return home is 1.82/229/317 million yuan, up 7%/25%/39% year over year. The current stock price corresponds to 23-year PE 13.3x, maintaining a “buy” rating.

Risk factors: Industrial equipment chain development falls short of expected risk; risk of rising raw material prices; exchange risk.