Event description: The company released its semi-annual report for 2023:2023H1. The company achieved revenue of 3.459 billion yuan, an increase of 25.9% over the previous year; net profit of 450 million yuan, an increase of 150.6% over the previous year; net profit of non-attributable income of 400 million yuan was deducted, an increase of 128.7% over the previous year. In 2023Q2, the company achieved revenue of 1,638 billion yuan, a year-on-year decrease of 1.6% and a decrease of 10.1%; net profit of 252 million yuan, a year-on-year increase of 78.8% and a year-on-month increase of 26.7%; net profit of non-attributable net profit of 236 million yuan, a year-on-year increase of 66.2% and a year-on-year increase of 43.8%.

Comment: The scale of production and sales continued to grow, and gross margin increased year-on-year

① Volume: The scale of production and sales continues to grow. Since the company's world-leading PQF production line was put into operation in 2021, it has greatly increased the company's pipe production capacity. Combined with the increase in foreign trade market demand in the oil and gas industry, demand for pipes for coal-fired electric boilers is picking up, and the company's production and sales scale has continued to grow.

② Price: Gross margin increased year over year, and financial expenses were drastically reduced. Thanks to the high demand for oil and gas, combined with the decline in manufacturing costs, the company's gross margin for 2023H1 increased by 6.26 pct to 18.15% year-on-year. At 2023Q2, the company's gross margin was 17.29%, an increase of 4.72 pct over the previous year, and a decrease of 1.64 pct over the previous year. At the same time, due to increased interest income and changes in exchange profit and loss, Q2's financial expenses were -104 million yuan, a decrease of 112 million yuan over the previous month, and a year-on-year decrease of 35 million yuan.

Future core highlights: Advanced production capacity continues to be released, and new new energy vehicle pipe production lines ① Demand for oil, gas and thermal power boiler tubes remains high. In terms of oil and gas pipelines, the company seizes opportunities for industry market recovery, focuses on developing and certifying foreign markets, and actively expands overseas markets. Global oil and gas investment is expected to continue to grow in 2023 to further boost oil and gas pipeline demand. In terms of thermal power boiler tubes, the National Development and Reform Commission held a coal insurance and supply conference in September 2022, and proposed that in 2022-2023, 165 million kilowatts of thermal power will be started, 80 million kilowatts will be approved every year, and 80 million kilowatts of production will be guaranteed in 2024. The total volume for three years is expected to be 200 million kilowatts. The company's demand for thermal power boiler tubes is expected to be boosted.

② The company's advanced production capacity continues to be released. The company returned to the main energy pipe line business, introduced the world's first PQF continuous rolling mill with the latest technology designed and manufactured by Germany's Simak, and put into trial operation on June 18, 2021. The company currently has a production capacity of 1 million tons of small to medium caliber special pipes. Against the backdrop of good downstream demand, it supports the company's 2023H1 production and sales volume to maintain year-on-year growth.

③ Build a new pipeline for new energy vehicles to create a new profit growth point. The company plans to invest in the construction of a precision pipe production line for new energy vehicles with an annual output of 50,000 tons. It is estimated that the project will reach an additional annual revenue of 525 million yuan after delivery, with a total annual profit of 63.07 million yuan. The post-tax IRR of the project is 11.65%, and the post-tax payback period is 933 years (including the construction period). Project construction helps the company lay out the NEV industry and increase the market share of the company's specialty products.

Profit forecast and investment advice: We believe that benefiting from rising industry demand, continuous release of new production capacity, and declining raw material prices, the company's net profit for 2023-25 is expected to be 699/619/725 million yuan in that order. PE corresponding to the closing price on August 28 is 8x, 9x, and 8x, maintaining the “recommended” rating.

Risk warning: Prices of raw materials fluctuated greatly, downstream demand fell short of expectations, and production capacity release fell short of expectations.