3Q23 performance is in line with our expectations

The company announced 1-3Q23 results: revenue 1.543 billion yuan, year-on-year + 6.6%; return to the mother net profit 202 million yuan, year-on-year + 12.6% politics 3Q23 income 544 million yuan, year-on-year + 3.7%, month-on-month + 8.2%; return to the mother net profit 76 million yuan, year-on-year + 1.8%, month-on-month + 54.1%, the performance is in line with our expectations.

Trend of development

Since the beginning of this year, the approval of nuclear power has accelerated, and the company's capital increase subsidiary Shentong Nuclear Energy has further enhanced its competitiveness. 1-3Q23 six nuclear power units have been approved in China, and some projects have been invited for tender. We believe that nuclear power still plays an important base load role in the new power system and is expected to maintain the approval / start-up rate of 6-8 units per year in the future. The company's nuclear power valves meet the needs of the current main reactor nuclear power units, and the production capacity covers the delivery of related valves for 6-8 new units every year. By the beginning of September 2023, more than 150000 nuclear power valve products of various types have been used online. The company spun off the nuclear power division to set up a wholly-owned subsidiary, Shentong Nuclear Power, and obtained a license for the design and manufacture of nuclear safety equipment in July 2023. In September, the company increased its capital to Shantong Nuclear Power by 200 million yuan with its own assets, which we believe is expected to further enhance the competitiveness of the company.

Energy-saving services are expected to contribute to stable income and increase the promotion of "valve butler" business. In terms of energy-saving services, the company has put into production of Jinxi 135MW project in August 2022. At present, No. 2 boiler of Handan Old City Integration Project undertaken by Ruifan Energy Saving subsidiary has been completed commissioning and gradually put into production. We expect the average annual contract income during the sharing period to be about 300 million yuan, which is expected to contribute stable income to the company.

In terms of metallurgical valves, in the face of the sluggish demand of the metallurgical valve industry, the company continues to increase the promotion of the "valve housekeeper" business, while improving the company's pricing strategy and expanding the price advantage. We think it will help the company to better seize the opportunity of demand improvement and further increase its market share.

Operating cash flow has been turned positive, waiting for the situation to be improved. 1) Cash flow: the operating cash flow of the company in the first three quarters of 2023 is 7.245 million yuan, which is more regular than that of 1H23, but-89.29% compared with 67.65 million yuan in the same period last year. It is mainly due to the decline in sales rebate compared with the same period last year. 2) Gross profit margin: 1-3Q23 company gross profit margin is 30.46%, year-on-year + 0.95 ppt 1.16ppt 3Q23 is 30.43%, year-on-year-1.16ppt, month-on-month-0.07ppt. 3) expense rate: the company's expense rate during the first three quarters was 15.18%, year-on-year + 1.34ppt, of which financial expenses increased by 69.05% compared with the same period last year, mainly due to the increase in bank loan interest. 4) net interest rate: the net interest rate of 1-3Q23 company is 13.06%, year-on-year + 0.69pptjue 3Q23 is 14.01%, year-on-year-0.27ppt, month-on-month + 4.17ppt.

Profit forecast and valuation

Due to the overall downturn in the metallurgical industry, we reduced the net profit of 2023 to 285 million yuan / 340 million yuan by 5.4% in 2024. The current share price corresponds to a price-to-earnings ratio of 18.0 times 2024 / 15.1 times earnings.

Maintain the outperform industry rating, taking into account the downward valuation center of the sector as a whole, we cut the target price by 20.2% to 13.40 yuan corresponding to 23.9 times 2023 price-to-earnings ratio and 20.0 times 2024 price-to-earnings ratio, which has 32.7% upward space compared with the current stock price.

Risk

The construction of nuclear power is not as expected and the return of energy-saving services is not as expected.