Key points of investment:
The company has been deeply involved in online flue gas monitoring and industrial process analysis for more than 20 years. It has successfully crossed the thermal power cycle, and its performance has been growing steadily. The company's environmental monitoring business is centered on ToB-side flue gas monitoring. Downstream mainly includes thermal power, petrochemical, chemical, steel and other fields, gradually achieving comprehensive development of gas and water solidification and full ToB/ToG coverage. In 2020, the company surpassed the thermal power cycle, completed an inflection point in revenue and profit, and entered a stage of steady development. The company's revenue in 2022 was 1,555 million, of which environmental monitoring systems, system transformation and operation and maintenance, gas analysis instruments and spare parts contributed 61%, 19%, and 15% of gross profit, respectively. In 2022, the company's net interest rate reached 19%, the company had sufficient cash assets on hand ($1,648 million, accounting for 62% of net assets), the overall debt ratio remained low (about 23%), and ROE gradually rebounded to more than 10%.
Environmental monitoring: With the acceleration of thermal power investment and the promotion of ultra-low emissions in the non-electric sector, the company's main business is expected to continue to improve. 1) The ultra-low emission transformation for thermal power generation has been gradually completed, and investment in thermal power is expected to accelerate in the 14th Five-Year Plan, driving an increase in demand for thermal power monitoring equipment. 2) The transformation of ultra-low steel emissions is gradually accelerating. In 2019, China proposed ultra-low steel emission transformation. According to the China Iron and Steel Association, by the end of 2021, 145 million tons of production capacity had been completed, and there is still room for transformation of nearly 400 million tons of steel production capacity ahead of the “14th Five-Year Plan” target. 3) In June 2023, draft comments on the implementation of ultra-low emissions in non-electric fields such as cement and coking were released one after another, which is expected to drive the flue gas monitoring equipment business to begin to expand. All of the above policies clearly give ultra-low emission enterprises such as preferential environmental taxes, no discontinuation of production and production restrictions, and differentiated electricity prices. We believe that the transformation of the non-electricity sector is expected to accelerate in the future.
Carbon monitoring: The industry is expected to accelerate release, and companies will benefit first. The 14th Five-Year Plan proposes accounting as the main focus and monitoring as a supplement, and gradually promotes pilot carbon monitoring and evaluation. Looking at key industries: The carbon monitoring market space in the thermal power industry is about 1,335 billion yuan. In the future, it is expected to gradually expand along with the expansion of the carbon market. Looking at key cities, China's urban greenhouse gas monitoring market space is about 5 billion yuan. The company has customer and product advantages in the field of carbon monitoring. In 2022, the company successfully won the bid for carbon monitoring test site projects of large groups such as Huaneng and Datang. In August 2022, the company and China Accounting Intelligence, a subsidiary of the China Institute of Metrology, set up a joint venture to further expand carbon monitoring business. In 2023, China Carbon Transport Company and China Merchants Shipping and others launched an online measurement and monitoring system for ship carbon emissions. In the future, it is expected to directly benefit from the promotion of the IMO and EU shipping carbon markets.
Scientific instruments: Independent research and development+external acquisitions to promote the localization of mass spectrometers and chromatographs. 1) Mass spectrometer: In 2015, the company acquired KORE in the UK and gradually mastered time-of-flight mass spectrometer technology. Currently, it has successfully launched a proton transfer reaction time-of-flight mass spectrometer, focusing on expanding the VOCs travel monitoring market; 2) Chromatograph: In 2016, the company acquired Belgian Orthodyne to accelerate process analysis and promotion in the semiconductor industry.
Investment analysis: We expect the company's net profit to be 273/305/349 million yuan respectively in 2023-25, and YOY of -3.6%, 11.4%, and 14.5%. The corresponding valuation of the current market value is 18/16/14 times. Referring to 25 times the average valuation level of comparable companies in 2023, we gave the company 25 times the valuation in 2023, with a target market value of 6.8 billion yuan. Compared with the latest market value, there is room for 40% increase. Covered for the first time, and gave it a “buy” rating.
Risk warning: The new construction of thermal power generation falls short of expected risks, the implementation of policies in the non-electricity sector falls short of the expected risk, there is a risk that market competition will increase, and the progress of new business development falls short of expectations.