Incident: The company released its 2023 semi-annual report on August 30. In '23, H1 achieved revenue of 460 million yuan, +18.24%, net profit of 61 million yuan, +18.81% year-on-year, net profit of 61 million yuan, after deducting non-attributable net profit of 61 million yuan, +22.46%.

Comment:

Revenue has grown steadily, and profitability is under pressure in the short term. Benefiting from increased production capacity+strong demand from downstream customers, steady growth in performance was achieved. The increase in gross margin was mainly due to a fall in raw material prices and an increase in the self-sufficiency rate. In Q2 2023, we achieved operating income of 225 million yuan (YoY +29.8%), net profit of 39 million yuan (YoY +27.0%), gross sales margin of 26.4% (YoY +1.7 pct), and net sales interest rate of 15.3% (YoY -0.3 pct).

Actively expand new businesses such as energy storage and data centers, and continue to optimize the product structure. The company has specially set up a market development and technical support team for energy storage products and pipeline systems in the field of big data supercomputing. In the field of energy storage, business negotiations or cooperative relationships have been established with more than 40 energy storage customers, including G customers, B customers, and Q customers, and energy storage products have been supplied in batches; in the data center field, the company has successfully developed cooling system piping products used by a big data server company and has been verified and qualified by customer No. 1. Currently, this type of product is mainly imported products from abroad. Sichuan Huan has taken the lead in filling the domestic gap and has the advantage of subsequent import substitution.

Actively lay out production capacity to improve product self-sufficiency. The company set up an injection molding branch and processing center, and changed the original outsourced parts, molds, and tooling to homemade. The injection molding branch produced plastic joints, O-rings, seals, etc., and the processing center produced tooling molds, inspection tools, and tooling, which reduced intermediate links, reduced procurement costs, reflected the advantages of assembly and integration, and also met customer requirements for product assembly. Furthermore, the plants under construction will be put into production one after another in 2023, further increasing the company's production capacity.

Profit forecast and investment rating: The company is a leading automotive thermal management leader in China. It is actively expanding new businesses such as energy storage and data centers, and its performance is expected to grow rapidly. We expect the company's net profit to be 178, 227, and 276 million yuan in 2023-2025, corresponding to PE 18, 14, and 12 times, respectively, maintaining the “buy” rating.

Risk factors: Fluctuations in raw material prices, production capacity release falling short of expectations, customer development falling short of expectations, and sales of supporting models falling short of expectations.