Gaolan Co., Ltd. released its 2023 three-quarter report. The performance is in line with expectations. Gaolan Co., Ltd. released its three-quarter report for 2023. The company achieved operating income of 403 million yuan in the first three quarters of 2023, a year-on-year decrease of 71.63%, and net profit attributable to the parent company of 4.9576 million yuan, a year-on-year decrease of 436.21%.

Among them, 23Q3 achieved revenue of 143 million yuan, a year-on-year decrease of 75.08%, and realized net profit of 2,724,400 yuan, a year-on-year decrease of 778.88%. The fluctuation in the company's performance is clearly mainly due to: 1) the subsidiary Dongguan Sixiang was removed from the list; 2) the reduction in government subsidies during the reporting period led to a sharp decline in other earnings. The company's other revenue for the first three quarters of 2023 was 5,045,500 yuan, compared to 25.821,400 yuan in the same period last year.

The water cooling business is under pressure in the short term, and is expected to achieve restorative growth along with UHV construction. The downstream of the company's water cooling business mainly targets the national grid. The products are DC water cooling products, new energy power generation water cooling products, flexible AC water cooling products, and engineering operation and maintenance. Since 2020, due to the decline in market demand, investment in the HVDC transmission industry has slowed. In 2020/2021, the national grid construction investment completed amount was 4896/491.6 billion yuan, and the DC project investment completed was 532/38 billion yuan respectively; in 2022, the State Grid plans to start construction of “10 AC (flow), 3 direct (flow)” and 13 UHV lines, with actual construction of “4 traffic (flow) 0 direct (flow)”. The decline in investment in DC projects for national grid construction has led to a decrease in the company's downstream demand, leading to a decline in the company's business performance of DC water cooling and other products. According to the State Grid plan, it is expected that “5 DC 2 AC” will be approved and “6 DC 2 AC” construction will begin in 2023. The UHV DC construction scale is the highest in history (5 DC lines started in 2015), UHV investment is expected to exceed 100 billion yuan in 2023, and the company's water cooling business is expected to achieve restorative growth along with UHV construction.

Demand for computing power is exploding, and the amount of liquid cooling in data centers is imminent. According to the Ministry of Industry and Information Technology's “Three-Year Action Plan for the Development of New Data Centers (2021-2023)”, by the end of 2023, the average annual growth rate of data center racks across the country will remain around 20%, the total computing power will exceed 200EFLOPS, and the PUE for new large-scale data centers and above will drop below 1.3. The company has extensive experience in the field of data center liquid cooling. The key products include server liquid cooling plates, fluid connection components, CDUs of various models and forms of heat exchange, tanks of various sizes and different powers, and heat exchange units. It has now formed two solutions for cold plate liquid-cooled data center heat management and immersion liquid-cooled data center heat management. The company's data center liquid cooling products can control the PUE value within 1.2. Currently, related products are gradually entering the batch supply stage. The server immersion liquid cooling product developed by the company has been used in the data center computer room of a well-known Internet enterprise in China.

Profit forecast: The slowdown in UHV investment has put pressure on the company's water cooling business, so the company's performance was lowered. The company's net profit for 2023-2025 is estimated to be 0.45/ 1.91/ 391 million yuan respectively, and the corresponding PE is 110/26/ 13 times, respectively. The company was given a PE valuation of 35 times the profit of 2024E, adjusted the target price to 21.63 yuan, and maintained the “buy” rating.

Risk warning: Server liquid cooling falls short of expectations, profit predictions and valuation judgments fall short of expectations