All of the company's business lines have highlights. Agricultural pumps are recovering strongly, the supply slope for energy-saving pumps in Europe is rapidly increasing, industrial pumps are growing steadily and rapidly, and liquid-cooled pumps have ushered in new opportunities driven by digitalization. The market is currently concerned that it will be difficult for the company to maintain a high growth rate under a high base. We believe that on the premise that the company has a good growth rate in all business lines, compounding the cost dividends released by product structure improvements and raw material price reductions, it is expected that the company will still have a lot of room for growth in the future. Currently, the company has sufficient orders. Benefiting from many favorable market factors such as the overseas heat pump/wall-mounted furnace market, domestic hydrogen fuel cells, and energy storage temperature control, etc., the future performance is expected to continue to grow at a high level.

Revenue and profit exceeded expectations. In 2023H1, the company achieved revenue of 903 million yuan, +33.70%; net profit attributable to mother of 167 million yuan, +68.31%, net profit after deducting non-return net profit of 162 million yuan, +70.79%. The main reason for the sharp increase in the company's net profit and net profit after non-return net profit was a significant increase in sales volume of the company's shielded pump products; after conversion 23Q2, the company achieved revenue of 542 million yuan in a single quarter, +29.76%, net profit of 107 million yuan over the same period. +46.95% YoY On the one hand, in the household shielded pump sector, domestic wall-mounted furnaces and coal-to-electricity projects have clearly recovered from a low base in 2022. At the same time, significant progress has been made in developing new markets, contributing well to both the company's revenue and profits. Demand in the civilian pump sector further improved month-on-month, and earnings continued to recover; the industrial shielded pump business sector maintained a consistent and steady growth trend; the liquid-cooled vehicle pump sector continued to achieve a relatively rapid growth rate on the basis of an overall small base. In Q2, all sectors grew steadily, and profitability continued to improve.

The cost rate increased during this period. 2023H1's sales/management/R&D expense ratio was +1.20 pcts/-0.34 pct/+0.69 pct, respectively, to 4.40%/5.38%/4.38%, and the company's financial expenses were -316 million yuan. The main reason for the change in financial expenses was that the company had more interest income in the current period; the change in sales expenses was mainly due to the increase in sales staff remuneration, travel expenses, advertising expenses and exhibition expenses; the change in management expenses was mainly due to an increase in fixed asset repair costs and an increase in managers' compensation after adding a subsidiary; R&D The cost change is mainly due to increased R&D efforts in the current period; many of the company's expenses are phased, and it is expected that the cost rate will fall throughout the year.

Domestic energy-saving pumps are in strong demand in Europe. The company's growth in energy-efficient pumps in 2022 was mainly due to its entry into the European OEM supply chain. The opportunity comes from the energy crisis causing European competitors to cut production of energy-saving pumps in large quantities, while demand for heat pumps and wall-mounted furnaces is facing a high increase. Due to a mismatch between supply and demand, the company was able to enter mainstream heat pump and wall-mounted furnace companies in the European market, such as Samsung, Daikin, and Vaillant. 22H1 achieved a breakthrough from 0 to 1 on the supply chain side and accelerated release in 22H2. We believe that European OEMs have a high degree of recognition for the company's energy-saving pumps. According to our estimates, the company's market share of energy-saving pumps (heat pumps and wall-mounted stoves) in Europe increased from 4% in 2021 to 10% in 2022.

23H1's shielded pump products achieved sales of about 390 million yuan, +64% year-on-year; of these, orders for energy-saving pumps were plentiful and the capacity utilization rate was high. 23H1 sold more than 750,000 units of energy-saving pumps, an increase of more than 200% over the previous year; from January to July 2023, the number of heat pump supporting sales units was 154,900 units per month, +50% year-on-year.

Domestic sales of agricultural pumps are recovering strongly, and export orders are lagging behind. The adverse effects of the epidemic on civilian pumps during the 2022 epidemic period declined marginally. Domestic sales showed a recovery trend. In the era of stock competition, market share was concentrated at the top. Relying on product technology advantages, the company developed markets in Asia and other European countries overseas, strongly driving a continuous increase in its market share, and the traditional business sector gradually recovered. Agricultural pump products are essential production factors, and demand will fluctuate with external factors (the industry is cyclical), but overall demand is showing a steady upward trend.

Benefiting from the liberalization of epidemic control, China's agricultural production activities gradually resumed, and the company's agricultural pump business grew steadily. 23H1 reached 305 million yuan, +11% over the same period last year.

Driven by digitization, liquid cooling pumps have ushered in new opportunities. As an emerging product, liquid cooling pumps are mainly aimed at downstream hydrogen fuel/lithium batteries and energy storage temperature control fields. Driven by digital technology, the company's liquid-cooled pump products and scenarios are based on new infrastructure (power energy transformation, digital transformation promotion). As general machinery, pumps, as general machinery, have ushered in new development opportunities under the temperature control and liquid cooling demand brought by digital driving of power equipment. 23H1 achieved sales revenue exceeding 200 million yuan, with a growth rate of over 80% under the same caliber.

The product structure has improved, and profitability is expected to continue to increase. The company 23H1 achieved a gross profit margin of 33.13%, a year-on-year rate of +6.9 pcts, and a net interest rate of 18.28%, and a year-on-year rate of +7.35 pcts. On the one hand, falling raw material prices have effectively released pressure on the cost side. By the end of June, the Wind China commodity price index had fallen 20% from its 2022 high, and cold rolled/LME copper/LME aluminum had also fallen 24%/22%/41%. On the other hand, the improvement of the product structure and the increase in the share of high-margin products such as energy-saving pumps have played a key role in improving the company's profit. We estimate that the revenue of high-efficiency and energy-saving pumps in 2021 will account for about 10% of the company's hot water circulation shielded pump sector. By the end of 2022, this ratio was close to a quarter. 23H1 energy-saving pumps already accounted for more than ordinary pumps. We expect that the gross margin of energy-saving pumps is about 5-8 points higher than that of ordinary shielded pumps, and that the increase in sales share will significantly boost the company's profit level. Furthermore, the increase in sales of high-profit products such as industrial shielded pumps and automotive liquid-cooled pumps will further benefit the improvement of the company's profit quality.

Risk factors: Downstream prosperity falls short of expectations; new customer development falls short of expectations; raw material prices have risen sharply; exchange rate fluctuations; and the company's export sales fall short of expectations.

Profit prediction and valuation rating: The company's three main lines: 1. Entering the European supply chain system, energy-saving pumps open up new growth space; 2. Domestic replacement of industrial pumps; 3. Liquid cooling pumps are growing rapidly (hydrogen fuel cells & lithium batteries & digitalization related). The three main lines are progressing steadily as expected. We expect that in the future, as the supply slope for energy-saving pumps increases, the company's overall revenue and profit will be highly certain. Based on the interim report, we raised the company's net profit forecast for 2023-2025 to 3.52/4.33/535 million yuan (the original forecast value was 3.31/405/501 million yuan).

Combining comparable companies, Ling Xiao Pump Industry and Sunrise Oriental Wind in 2023, agreed to expect an average of 12x PE, and considering that the company's three main development lines continue to be implemented, future performance is highly certain. The company was given 15 times PE in 2023, corresponding to a target price of 32 yuan. Maintain a “buy” rating.