Revenue and net profit growth are in line with expectations. China West Power released the 2023H1 financial report. The company's 2023H1 achieved revenue of 9.22 billion yuan, up 7.37% year on year. Of these, 2023Q2 achieved revenue of 4.613 billion yuan, down 4% year on year, down 2.5% month on month, and realized net profit of 421 million yuan, up 12.55% year on year. Of these, 2023Q2 achieved net profit of 235 million yuan, down 3.3% year on year and 26.3% month on year.

Expenses remained stable during this period, and management expenses declined. The company's expenses rate for the period was 11.94%, of which the sales expense rate was 3.01%, an increase of 0.5 pct over the previous year, and the management expenses rate was 5.59%, a sharp decrease of 0.72 pct. The main reason is that after the company optimized the personnel structure, the total remuneration of managers and employees decreased year-on-year, and the financial expenses rate was 0.17%, up 1.01 pct. The main reason is that interest income is expected to decrease year-on-year due to a decrease in external fixed and structured deposits, and an increase in exchange losses due to the opposite direction of the US dollar exchange rate. The three rates remain at a historically low level.

Investment in R&D was increased, and R&D expenses increased by 7.87%. The company has formed a deep historical accumulation in the field of UHV transmission and distribution equipment manufacturing, and has built a strong technical foundation. During the reporting period, 6 national key R&D projects were promoted according to plan. The 190kA high-capacity generator circuit breaker passed all type tests, the ±800kV rubber-impregnated paper-soaked capacitive converter variable bushing passed tests and verification at high altitudes in Tibet, and the core technology continued to make new breakthroughs.

The share of winning bids for UHV core equipment has increased dramatically. Since 2023, the company has participated in the bidding for 5 UHV projects, with great results. Among them, in the Jinshang-Hubei and Ningxia-Hunan ±800kV UHVDC transmission engineering equipment tenders, the company's eight subsidiaries won a total bid of 4.739 billion yuan. The winning shares of the converter transformers and converter valves were 38.1% and 45.6% respectively, ranking second and first respectively, and the level of technology and service was continuously recognized by the State Grid.

Construction of “5 Direct 2 Transactions” is expected to begin in 2023, and the company is expected to fully benefit from the acceleration of UHV construction. The Jinshang-Hubei, Longdong-Shandong, Hami-Chongqing, and Ningxia-Hunan DC UHV projects have already started. It is expected that 5 DC UHV and 2 AC UHV projects will commence throughout the year. Looking ahead to the 15th Five-Year Plan period, it is expected that an average of 3-4 DC UHV lines will be started every year, and the industry boom will continue until the 15th.

Profit forecast and investment suggestions: According to the company's bid winning situation and delivery pace for UHV and main network equipment, we lowered the company's revenue forecast for 2023-2025 by 11.2%, 12.0%, and 11.0% to 209.4/279.6/36.9 billion yuan, and reduced net profit by 6.1%, 4.2% and 7.1% to 827/13.28/1,815 million yuan. Assuming a sustainable growth rate of 2% and WACC of 7.4% (the original assumptions were 0.2% and 7.5%), according to the DCF model, we slightly lowered the target price from 6.79 yuan/share to 6.61 yuan/share to maintain the “superior to market” rating.

Risk warning: 1. Power grid investment falls short of expectations; 2. Intense market competition has led to a sharp drop in gross margin; 3. Raw material prices have risen sharply.