Key points of investment
Incidents:
Recently, the company announced that it intends to invest in the establishment of a wholly-owned gas subsidiary to implement a 30,000 Nm3/h air separation set and 50,000 Nm3/h air separation set from Shanxi Jingang, and invest in the construction of a new 80,000Nm3/h air separation plant project to provide industrial gas supply services for Shanxi Jingang.
There are 160,000 square meters of new gas investment projects signed by industrial gas leaders throughout the year. The signing of the Shanxi Jingang Gas Investment Project has a total oxygen production volume of 160,000 m3/h, accounting for about 38% of the new gas investment project orders in 2023 (420,000 m3/h of new orders signed in 2023). The signing of the project will help the company to continue to expand its investment map in the gas sector and accelerate the company's layout in the Shanxi region, thereby further enhancing the company's competitiveness in the regional gas market.
Hangzhou Capital, the controlling shareholder, plans to acquire Yingde Gas and promises to promote the restructuring of Gas Power Technology (the main asset is Yingde Gas) with the listed company after the transaction is completed. It is the largest independent industrial gas supplier in China.
In 2020, Gas Power Technology (including Baosteel Gas) had revenue of 19.4 billion yuan, the market share of the independent third-party gas supply market was 22.3%, and net profit was 2.3 billion yuan. 80% of the company's revenue comes from air separation gas, and the vast majority comes from on-site gas supply. The company's profitability is strong, with a 2020 ROE of 20%, gross profit margin of 28%, and a net margin of 13.2%.
According to the announcement, after the transaction was completed, Hangzhou Capital held 30% of the buyer's SPV and was the largest shareholder (non-controlling shareholder) of the buyer's SPV. After the seller completes the internal restructuring, the target company will mainly be engaged in the manufacture and sale of on-site gas, retail gas, specialty gases, and clean energy products, and is in the same business as Hangzhou Oxygen Co., Ltd.
Hangzhou Capital promises: Hangzhou Capital will push the listed company to sign an asset restructuring agreement with the buyer's SPV within 36 months after the transaction is completed, and the listed company will disclose the transaction plan.
If the listed company and the buyer's SPV carry out asset restructuring, the listed company will achieve restructuring and integration of high-quality assets in the same industry, which will help listed companies exert synergy effects, expand production scale, improve asset quality, optimize financial conditions, and enhance market competitiveness.
Hangzhou Oxygen Co., Ltd.: Towards the leading industrial gas industry in China! Domestic substitution to create an advantage in the entire industry chain The company's pipeline gas business has accelerated in recent years. The stock operating market share is 10%, and the newly signed gas operating market share is 40-50%. It is estimated that by the end of 2025, the company's gas operating scale will exceed 3 million square meters. The compound growth rate of gas business revenue will reach 23% from 2022 to 2025, and the company's gas business revenue will account for more than 75% in 2025.
The 2022 equity incentive plan was granted. Net profit is expected to grow steadily in 2023-2024. Equity incentives will be lifted over a three-year period, 24, 36, and 48 months, respectively, from the date the registration of the restricted shares granted accordingly. The unlocking ratios are 40%, 30%, and 30%, respectively. Equity incentive performance (net profit after deduction of non-return to mother) unlock conditions: Based on the average net profit deducted from non-return to mother in 2018-2020 (i.e., 688 million yuan), the growth rate for 2022 to 2024 was not less than 60%, 66%, and 73%, or 1,101, 11.43, and 1,191 billion yuan.
Growth path: Demand growth+increased market share+increased profitability, with long-term profit margin exceeding several times (1) Industry demand continues to grow: 1) Total demand in the industrial gas market is nearly 200 billion yuan, of which the third-party outsourcing market is growing rapidly. The outsourcing ratio is expected to increase from 41% in 2021 to 45% in 2025. 2) In 2021, the size of China's industrial gas market increased by 10% year-on-year, and China's per capita gas consumption accounted for 30-40% of the per capita gas consumption in developed countries such as Western Europe and the United States. China's industrial gas market is expected to grow at a compound rate of 6-8% by 2025. (The above data source: Please refer to the company's in-depth report “Hangzhou Oxygen Co., Ltd. In-depth PPT: Domestic Substitution, Product Upgrade, Towards Industrial Gas Leaders”, July 8, 2022) (2) Increased company market share: Under the domestic substitution trend, the company's stock share in the third-party gas supply market in 2021 was 9%, and the incremental share of the third-party gas supply market is expected to double in 2025; it is expected that the share of future companies in the third-party stock market will be 3-4 times that of 2021 (30-40% market share).
(3) The company's product structure has been upgraded, and profitability continues to increase: 1) The gas business's share of revenue continues to increase, and the growth and profitability of the gas business is higher than that of the equipment business. 2) The share of retail revenue in the gas business continues to rise, and the profitability of retail gas is higher than that of pipeline gas. 3) The share of electronic gas revenue in the retail gas business will continue to increase, and the profitability of the electronic specialty gas business is far higher than that of ordinary industrial gas retail business.
Profit forecasts and investment advice
The company is a leading domestic air separation equipment and industrial gas enterprise. Technology research and development advantages, equipment-EPC-gas operation in the entire industry chain, brand advantages, system and management advantages form the core competitiveness of the company. We expect the company's net profit to be 1.23 billion yuan, 1.45 billion yuan, and 1.73 billion yuan respectively in 2023-2025, with year-on-year growth rates of 1%, 18%, and 19%, respectively, and a three-year compound growth rate of 13%, corresponding to PE 21, 18, and 15 times, respectively. Maintain a “buy” rating.
Risk warning
Controlling shareholder transaction uncertainty risk, industry competition risk and market risk, gas price fluctuation risk.