Investment highlights
For the first time, it covered Hangzhou Oxygen Co., Ltd. (002430) to outperform the industry. The target price is 35.00 yuan. The company is a domestic air separation equipment and industrial gas faucet, corresponding to the 2024e target P/E ratio of 23x. The reasons are as follows:
Leading domestic air separation equipment, transformed into a comprehensive industrial gas service provider. Hangzhou Oxygen Co., Ltd. is the first manufacturer of air separation equipment in China. The actual controller is the Hangzhou State-owned Assets Administration Commission, which has a long history and strong technology.
The company first started with the air separation equipment business. In 2022, the domestic market share exceeded 40%, ranking first in the country. Relying on equipment advantages, the company expanded to downstream gas sales business. After 2015, gas sales accounted for the company's largest share of revenue, and the company plans to build the largest integrated gas service provider in China.
The industrial gas pattern is concentrated, and the company has equipment and service advantages. The CR4 of the global and domestic industrial gas market exceeds 50%, and is mainly monopolized by foreign oligopolies. Hangzhou Oxygen shares only account for about 6% of the domestic share. Reviewing the growth trajectory of the international gas leader Linde Group, we believe that a strong platform to expand categories and continuous mergers and acquisitions is an important path for gas companies to grow bigger and stronger. Compared with foreign peers, the company has a stronger response speed and guarantee capacity in technical services; compared with domestic peers, the company has a higher share in the equipment market, rich project experience, and customer resource advantages for transformation gas services.
The proposed merger with Yingde Gas is expected to increase profit margins due to the scale effect. Referring to international experience, unleashing scale effects through asset integration and expanding to higher value-added gas businesses can raise profit margins. Compared to Linde, there is still a lot of room for improvement in the gross margin of Hangzhou Oxygen Co., Ltd. As the first tier of domestic industrial gas companies, Yingde (Gas Power) has a market share of 10.1% in 2021, with the highest domestic market share. If Hangxi and Yingde successfully merge, the market share is expected to increase to more than 16%, and the overall profit margin level is expected to increase under the scale effect.
What is our biggest difference from the market? The market believes that the company is slowly entering the gas industry as an equipment company. We are optimistic about the company's advantages in integrating into the regional market as a local state-owned platform and has great potential for development.
Potential catalyst: Hangxi Co., Ltd. and Yingde Gas are advancing the integration process at an accelerated pace.
Profit forecasting and valuation
We expect the company's 2023-2025 EPS to be 1.23 yuan, 1.53 yuan, and 1.89 yuan respectively, with a CAGR of 23.96%. We believe that the company is a leading domestic air separation equipment enterprise, leading the industry in product technology and customer resources, and has obvious platform and scale advantages. It gives the company a 2024e 23x target P/E, corresponding to a target price of 35 yuan, with room for a 30% increase compared to the current stock price. The current stock price of Hangzhou Oxygen Co., Ltd.'s 2024/2025 price-earnings ratio is 17.7x/14.3x, which is the first time it has been covered and given a “outperforming industry” rating.
risks
Industry competition risk; Yingde's acquisition progress falls short of expectations; risk of price fluctuations of major raw materials and outsourced accessories; risk of internal control and management of subsidiaries; risk of economic cycle fluctuations.