Matters:
Recently, the company issued the “Notice on the Progress of Repurchasing the Company's Shares”. As of January 31, 2024, the company has repurchased a total of 2,620,400 shares of the company's shares through centralized bidding, accounting for 0.3570% of the company's total share capital, with a transaction amount of 20,781,041.05 yuan (excluding transaction fees). Previously, the company held the 26th meeting of the 6th board of directors on November 8, 2023 to review and pass the “Proposal on the Company's Share Repurchase Plan”. The total repurchase capital was RMB 0.4-80 million (inclusive), and the repurchase price did not exceed 11.3 yuan/share (inclusive).
Guoxin Telecom's new opinion:
1) The company was founded in 1952 and is a leading domestic flat electromagnetic wire enterprise. Since its establishment, it has focused on its main business and continued to promote mergers and acquisitions, and has become a leading cable company in the Midwest. The company has a steady business style, values shareholder returns, and has maintained a dividend rate of more than 60% since 2018.
2) The company has two major electromagnetic wire production bases in Xiangtan and Wuxi, with a total production capacity of about 95,000 tons. The market share is leading in the field of 110kV and above transformers. The products are used in UHV, new energy power generation, new energy vehicles, special motors, superconductivity, etc. The company's products are exported to Europe, South America, Southeast Asia, Japan, etc. Overseas customers include ABB, Siemens Energy, GE and Toshiba, etc., and the company is actively demonstrating the viability of overseas layouts.
3) Electromagnetic wires are the core components of transformers. China's power grid investment is expected to grow rapidly during the “14th Five-Year Plan” period. Among them, UHV and main grid construction are top priorities. Driven by multiple factors such as the rapid development of new energy sources around the world, the upgrading of old power grids, and the acceleration of infrastructure investment, global power grid investment is expected to resonate in the next ten years. The company is expected to benefit as a supplier to major domestic and foreign transformer companies.
4) The full rate of flat wire slots is much higher than that of round wires. Applications in the field of new energy vehicles have the advantages of high power density, high conversion efficiency, good heat dissipation, and good quietness. However, the production process is difficult and early equipment investment is large. Currently, it is still in the early stages of development, and there is plenty of room for future penetration rate improvement. The company was an early entrant to flat electromagnetic wires for NEV motors. It already has a dedicated production capacity of 20,000 tons, and the third phase of the production expansion project is expected to be put into operation in 2025.
5) We expect the company to achieve operating income of 145.1/176.7/19.77 billion yuan in 2023-2025, up 9.9%/21.8%/11.9% year on year; net profit to mother of 4.61/5.82/727 billion yuan (corresponding to 2023-2025 PE is 13/11/9x, respectively), with a year-on-year increase of 24.4%/26.2%/24.9%. Combining absolute and relative valuations, we believe that the company's reasonable valuation is between 9.48-10.16 yuan (corresponding 24-year PE is 12-13 times), and there is room for a 13%-21% premium compared to the company's current stock price. First coverage, giving a “buy” rating.
Commentary:
A leading domestic electromagnetic wire company that has continued its entrepreneurial genes for 70 years
It started in 1952 and has continued its entrepreneurial DNA for 70 years. The company's predecessor can be traced back to the “Hengyang Toothbrush Button Factory” founded in 1952. Trial production of wire products began in 1956. In that year, it developed and produced the first plastic insulated wire in Hunan Province, registered the “Jinbei” trademark in 1981, changed its name to “Hengyang Cable Factory” in 1982, and successfully restructured in 2001 using the “full employee identity replacement” model.
Domestic flat electromagnetic wire leader, a leading enterprise in the wire and cable industry. The company was officially founded in 2004 and listed on the Shenzhen Stock Exchange in 2010. It has been focusing on the wire and cable industry for a long time. Through many mergers and acquisitions, the company has now established two major flat electromagnetic wire industry bases in Xiangtan and Wuxi and five cable industry bases in Changsha, Hengyang, Chengdu, Wuhan and Wuchang. As of the first half of 2023, the company had 447 patents and participated in the drafting and preparation of more than 40 national, provincial, group and industry standards. The company ranked among the top 20 most competitive enterprises in China's cable industry for 6 consecutive years, and ranked 12th in 2022.
The company is a private enterprise with a stable shareholding structure. Mr. Wu Xueyu, the founder and chairman of the company, directly holds 8.18% of the company's shares. Chairman Wu Xueyu and his wife Sun Wenli hold 15.69% of the company's shares through indirect control of Shenzhen Nengxiang Investment and Development Co., Ltd. The two are concerted actors. The two hold a total of 23.87% of the shares.
The company actively mergers and acquisitions, and has formed five leading regional brands. The company has integrated the brands and resources of many high-quality companies in the industry through many mergers and acquisitions. Currently, the company has set up 25 subsidiaries. The subsidiary's business covers the three business fields of electromagnetic wire, wire and cable, and service industries. The products and businesses include wire and cable, electromagnetic wire, and cold chain logistics. At present, the company has formed five major cable brands: “Jinbei”, “Feihe”, “Tabai”, “Ganchang” and “Tongli”, and has become a leading cable enterprise in the central and western regions.
The company's executives are stable and have rich experience in the industry. The company's main executives have been engaged in production and management in the wire and cable manufacturing industry for a long time. They are all veterans in the industry, and have been working for the company for a long time and have been deeply involved in the business segmentation of supervisors for a long time. Mr. Wu Xueyu has been the chairman of the company since October 2007. He has rich management experience in wire and cable companies, and has received honors such as Star Entrepreneur for medium-sized private enterprises in Hunan Province. Vice Chairman Fan Zhihong has been involved in wire and cable-related business since 1995, and has been the company's vice chairman and deputy general manager since 2007.
Actively implement dividend policies and focus on long-term shareholder returns. Since its listing in 2010, the company has paid cash dividends every year to achieve its long-term vision of growing together with shareholders. As of 2022, the company's total dividends reached 1,311 billion yuan, accounting for 56.8% of the total net profit for the period; since 2019, the company's dividend ratio has increased significantly, and the dividend rate has remained around 70% in recent years.
Focus on the two major products: electromagnetic wire and wire and cable. The downstream application field is broad in the flat electromagnetic wire business: master various insulation methods, and has a wide range of applications. An electromagnetic wire is a conductive metal wire with an insulating layer. It is used to wind coils or windings of electrical products to achieve mutual conversion of electric energy and magnetic field energy. The company is a leading global enterprise in the field of flat electromagnetic wires. At the same time, it has mastered the three insulation methods of “enameled, enamel+film, enamel+peek”, and many products and technologies are at the leading international level. The company's flat electromagnetic wire products mainly cover two major scenarios of transformers and motors, and are deeply involved in terminal markets such as UHV, wind power and photovoltaics, new energy vehicles, and superconductivity. Over the years, the company has established long-term and stable cooperative relationships with leading downstream enterprises.
Wire and cable business: rich business experience, obvious brand synergy. The company has been deeply involved in the cable industry for more than 70 years. It has rich experience in R&D, production, operation and management in the wire and cable industry, and has set up seven wire and cable industry bases in the five provinces of “Xiang, Gan, E, Jiangsu and Chuan”. After years of mergers and acquisitions, the company incorporated multiple brands into the group, creating obvious synergy effects. The company's wire and cable products are widely used. Wire products are widely used in construction, decoration, security control and other fields. Cable products are widely used in smart grids, rail transit, new energy vehicles, wind power, photovoltaics, building decoration and other fields.
Cold chain business: break out of the operating trough and create a national business card. The company's Yunleng Cold Chain consists of 80,000 square meters of agricultural products wholesale market, 100,000 tons of cold chain storage, and 20,000 square meters of office buildings. It is a professional cold chain frozen goods market in the central and southern regions, and has won the title of “China's Top 100 Cold Chain Logistics Enterprises” for three consecutive years.
In 2022, the company received a national business card for the main area of the key cold chain logistics base in Changsha. In 2022, the company contracted its food trade business, digested the backlog of pork inventory in the early stages, and returned to focusing on property asset appreciation and business operation value-added, turning performance losses into profits.
The company attaches great importance to R&D and has built multiple national platforms. Over the years, the company has built a number of technology research and development platforms, including the National Electric Transmission and Transformation Product Quality Supervision and Inspection Center (planning) cable inspection base to jointly build a third-party service platform, the National Wire and Cable Product Quality Supervision and Inspection Center (Wuhan) Hunan Workstation, the Hunan National Defense Science and Technology Key Laboratory for Special Wires and Cables, and the Postdoctoral Research Mobile Station Collaborative R&D Center.
The company has continuously improved the level of tooling equipment, and introduced some production equipment from Germany and the United States to fill the domestic gap.
Electromagnetic wire technology is strong, and the products are used in high-end markets such as UHV and superconductivity. In the field of power transmission and transformation, the company's electromagnetic wires are mainly used in the high-end market of 220 kV and above, leading the UHV market share. The UHV projects the company has participated in include Zarut-Qingzhou, Yue-DC, Fujian and Guangdong back-to-back, Jingmen-Changsha-Wuhan, and Sichuan-Chongqing UHV. In the field of nuclear power, the company's products have been used in major projects such as Qinshan, the “Hualong 1” main pump, Daya Bay, and Karachi. The company is at the leading level in superconducting cable insulation in China. Its products are used in medical diagnosis, monocrystalline silicon superconducting induction furnaces, superconducting magnetic levitation, and magnetic-controlled nuclear fusion.
Investment advice: first coverage, giving a “buy” rating
Based on the valuation of the above aspects, we believe that the reasonable value of the company's stock is between 9.48-10.16 yuan, which corresponds to the 24-year dynamic PE range of 12-13 times, and there is room for a 13%-21% premium compared to the company's current stock price. We believe that the company is a leading domestic electromagnetic wire company, mainly supplying UHV/UHV transformers, and is expected to fully benefit in the context of the global power grid construction boom; the company is actively exploring overseas markets and is actively demonstrating the viability of overseas layouts. The company entered the NEV motor flat electromagnetic wire market earlier, and there is plenty of room for future development. Furthermore, the company maintains a high dividend ratio and values shareholder returns. We expect the company to achieve operating revenue of 145.1/176.7/19.77 billion yuan in 2023-2025, up 9.9%/21.8%/11.9% year on year; achieve net profit to mother 4.61/5.82/727 billion yuan, up 24.4%/26.2%/24.9% year on year; and give the first coverage a “buy” rating.
Risk warning
Valuation risks
We used absolute valuation and relative valuation methods. Comprehensive analysis from multiple angles showed that the reasonable valuation of the company was between 9.48-10.16 yuan, but the valuation was calculated based on many assumptions, in particular the calculation of the company's free cash flow over the next few years, the calculation of the cost of equity capital Ke, the assumption of a sustainable growth rate, and the selection of valuation parameters for comparable companies, all of which added many personal judgments, which in turn led to the risk of valuation bias, as follows:
1. Estimates that the company may maintain good revenue and profit growth for a long time in the future are optimistic, leading to a high calculated value of free cash flow over the next 10 years, leading to a risk that the valuation will be optimistic;
2. The cost of equity capital Ke has a great impact on the company's valuation. The risk-free interest rate of 2.70% and the stock risk premium of 7.00% used in calculating Ke may all be low, leading to a lower calculated value of Ke, leading to a risk of overestimating the company's valuation; 3. We assume that the company's TV growth rate will be 1.0% after 10 years. The downstream industry of the company's products is mainly power grid construction. Currently, growth is good, and downstream demand is high, but in the long run, the possibility that the industry's growth will slow down or even decline. the risk of causing the company to be overvalued;
Relative valuation aspect: We mainly focus on the company's 24-year valuation, select a comparable company's 24-year average PE as a reference, and finally determine that the company's 24-year reasonable PE is between 12-13 times. The above valuation method has the following risks: the selected comparable companies have differences in their corresponding downstream applications, differences in market competitive factors and patterns, and the overall valuation level of the industry is too high.
The risk of profit forecasting
Grid investment falls short of expectations: The pace of grid investment has a significant impact on the company's performance. If the grid investment pace or amount falls below expectations, the company's performance growth rate may be affected.
Prices of upstream raw materials have risen sharply: The company's direct or indirect raw materials include copper, etc. If the price of upstream raw materials rises sharply, there is a risk that gross margin will be overestimated.
Overseas market development progress falls short of expectations: Currently, the company's overseas expansion momentum is good. If overseas market development progress falls short of expectations in the future, there is a risk that revenue and gross margin will be overestimated.
The progress of production capacity construction falls short of expectations: the company is promoting the expansion of electromagnetic wire production. If construction progress falls short of expectations, there is a risk that revenue will be overestimated.