Affected by the slowdown in installed capacity growth in the wind power industry in the first half of the year and the careful commencement of wind farm construction, the company's 2023H1 performance fell short of expectations. It is expected that with the recovery of wind power installations in the second half of the year, the company's new production capacity will be released steadily and the product structure will continue to be optimized. At the same time, the company is expected to welcome a marked increase in shipments and profitability. At the same time, the company lays out the computing power market and improves long-term development. Based on the company's 2023H1 financial report, considering that the growth of bearing shipments was slightly slower than expected, we lowered the company's 2023-25 EPS forecast to 0.50/0.88/1.36 yuan, respectively, and gave the company a target price of 30 yuan (based on 60 times PE in 2023) to maintain the “increase in weight” rating.

23H1 revenue has increased steadily, and profit levels have improved markedly. In the first half of 2023, the company achieved operating income of 846 million yuan (+4.32% YoY), net profit of 55 million yuan (+30.10% YoY), gross profit margin of 14.20% (2.54 pcts YoY). Performance growth was mainly due to fluctuations in tower flange prices and falling raw material prices, leading to an increase in the company's net profit and a marked improvement in profitability; 23Q2 achieved revenue of 414 million yuan (-5.87% YoY, -4.39% QoQ), net profit of 0.26 billion yuan (- 12.83% YoY, -10.34% QoQ), gross profit margin 14.15% (-0.10% QoQ). Due to the wind power industry's installed capacity falling short of expectations, the company's 2023Q2 performance growth rate has slowed down. It is expected that as wind power installations pick up in the second half of the year, the company's performance will gradually improve.

The flange business is progressing steadily, and technological upgrades are progressing smoothly. As a leading company in the rolled annular forgings and forged flange industry, the company is currently one of the few companies in the world that can manufacture 9.0MW and above offshore wind tower flanges. It has now achieved mass production of 12MW offshore wind tower flanges. 2023H1, the company's wind power tower flange business achieved revenue of 409 million yuan (+6.79% YoY) and gross profit margin of 14.03% (2.94 pcts YoY).

Affected by fluctuations in flange prices and falling raw material prices, the share of offshore megawatt flange products with high gross margin increased to optimize the company's product structure, and profit levels further improved. At the same time, the company is rapidly advancing large-scale projects, exploring other product fields in the context of wind turbine decommissioning and increasing demand for inventory market updates, and seeking a wider market in the fields of rolled annular forgings, forged flanges, and other free-forging products.

The gross margin of the bearing business has risen, and future profit contributions can be expected. Based on large-scale forging technology experience and industrial resources, the company strengthened the rapid layout of bearing and gearbox forging business through fund-raising projects. At 2023H1, the company achieved revenue of 4.2053 million yuan in the wind power bearing industry, with a gross profit margin of 11.60%. Affected by the slowdown in the pace of wind power installation in the first half of the year, the scale of the company's wind power bearing business was reduced compared to 2022, but thanks to the optimization of product structure and technical level, gross margin increased. Under the general trend of widespread application of independent propellers, with the gradual release of the company's production capacity, the company is expected to seize a higher market share. In terms of spindle bearings, along with the implementation of soft-belt-free hardening equipment imported by the company, it is expected that 2024 will usher in expansion, further increasing the overall profit level of the company's bearing business. Furthermore, the company expects to ship 30,000 tons of gear processing business in 2023. With the vertical layout and extension of the business, the company's future performance is expected to reach a new level.

Join forces with Shanghai Six Feet to lay out the computing power leasing business and create new performance growth points. According to the company's announcement, on July 28, 2023, the company and Shanghai Liuzhu jointly invested in the establishment of Shanghai Runliuzhu (the company holds 51% of the shares). It plans to cooperate to establish computing power centers in Shanghai, Fuzhou, Wuhu, Jining, etc., and build a GPU computing center cluster in the Yangtze River Delta. The Shanghai Six Foot Core Team has rich experience in building and operating AI intelligent computing centers (GPU computing power) and computing power market resources. The team has been deeply involved in GPU computing power for many years and has deep cooperative relationships with upstream GPU suppliers Nvidia and Xinhua III.

Risk factors: Wind power installation falls short of expectations; raw material prices fluctuate greatly; wind power component prices continue to fall; market competition intensifies; customer verification and expansion of the company's new products falls short of expectations; the release of the company's new production capacity falls short of expectations.

Profit forecast, valuation and rating: Based on the company's 2023 annual report, considering the slowdown in wind power installations in the first half of the year and the company's bearing shipment growth progress was slightly slower than expected, we lowered the company's net profit forecast for 2023-25 to 220/388/601 million yuan (the original forecast value was 459/6.79/960 million yuan). The corresponding EPS forecast was 0.50/0.88/1.36 yuan, respectively, and the corresponding PE price was 59/34/22 times. Currently, the average PE for comparable companies' shares, Haiguang Information, and Haili Wind Power in 2023 is 45 times (based on Wind's unanimous expectations). Considering the company's leading position and advantages in the wind power flange industry and at the same time laying out the computing power business, it is expected to fully benefit from the revival of the wind power industry's boom and the accelerated release of AI computing power demand. It should enjoy a certain valuation premium, giving the company 60 times PE in 2023, corresponding to a target price of 30 yuan. Maintain the “increase” rating.