Incidents:

The company released its semi-annual report for 2023. 23H1 achieved revenue of 439 million yuan, -3.83% year-on-year, and realized net profit of 31.7 million yuan, +505.26% year-on-year. Among them, 23Q2 achieved revenue of 230 million yuan, -16.47% year-on-year and +9.55% month-on-month; realized net profit of 19.46 million yuan, +24.23% year-on-year, and +58.86% month-on-month.

As a result of new business development, the deduction of non-net profit came under phased pressure. The comprehensive gross margin increased year-on-year, and the company deducted a non-net profit loss of 9.76 million yuan in the first half of the year. Since Liaoyuan Hongtu's performance promises that compensation shares can be recovered, it was confirmed that 27.45 million yuan of fair value fluctuation income could be recovered. The company is vigorously developing new energy businesses such as energy storage. Currently, various cost rates are at a high level. 23H1 sales/management/finance/R&D expense ratios are 13.31%/9.16%/1.25%/8.03%, respectively, compared to +4.38/1.57/0.53/2.92 pct, respectively; factors such as cost reduction and increased production efficiency drove the overall gross margin to +5.49 pct to 27.45% year-on-year.

We believe that with the expansion of the new energy business, it is expected that the cost rate will be diluted and the company's profitability will increase.

Smart meter revenue declined in the short term, and on-hand orders grew rapidly

The company's revenue declined year on year. We believe it was mainly affected by the phased decline in smart meter business revenue; business revenue for high and low voltage switchboards, ring network cabinets, box-type substations, and charging piles increased 10.52%/35.55%/55.65%/12.3%, respectively. According to our incomplete statistics, the total bid amount for various projects announced by the company since December '22 is 1,785 billion yuan. The traditional power equipment business is expected to benefit from a steady increase in the power grid investment boom. The deep technical reserves in the charging and switching business are expected to benefit from continued policy support, and the energy storage business is expected to benefit from rapid growth in advantages such as technology, channels, and sales models.

Overseas projects are progressing in an orderly manner, and the government level attaches great importance to it

On July 14, the Deputy Secretary General of the Jilin Provincial Government met with honorary representatives of the Chamber of Commerce and Industry of the Russian Federation (CCI) in Changchun. The Russian representative expressed confidence in cooperation with the “Life Supply Line” project. The company has begun to invest in the construction of a new energy charging and switching equipment production line dedicated to the “life supply line” project. At the same time, the Middle East New Energy Division and the Middle East Project Technology Department have been set up at the group level to efficiently provide products and services. Recently, the company's relevant leaders and technical team visited Russia and began technical communication with the Russian project team. The project is progressing in an orderly manner, which is expected to fully open up the company's long-term growth space.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2023-2025 to be 25.22/41.92/5.699 billion yuan respectively, with a year-on-year growth rate of 116.27%/66.25%/35.95%, and net profit of 1.68/2.87/455 million yuan, a year-on-year growth rate of 247.75%/71.35%/58.32%, respectively, a three-year CAGR of 111.3%, and EPS of 0.20/0.55 yuan/share. The corresponding PE is 33/20/12 times. Referring to the valuation of comparable companies, we gave the company 24 times PE in 24 years, a target price of 8.4 yuan, and maintained a “buy” rating.

Risk warning: Implementation of the agreement of intent falls short of expectations; overseas policy risks; increased competition in the industry, etc.