A leader in explosion-proof electrical appliances, rooted in the global explosion-proof electrical appliance market. The company's main products include explosion-proof electrical appliances for factories, explosion-proof electrical appliances for mining, and professional lighting equipment. The products are widely used in petroleum, chemicals, natural gas, coal mines, etc., and are expanding into emerging fields such as offshore, nuclear power, military industry, and new energy. Industrial explosion-proof products account for more than half of the company's revenue, and demand for stock replacement accounts for nearly 70% of revenue from the traditional oil and gas chemical market.

The company's overseas markets are developing smoothly, and there is potential for growth in the Middle East, Europe and the US. In 2022, 2023H1, foreign trade revenue accounted for 21% and 25% respectively.

The company operates steadily, with good cash repayment conditions, and restrained capital expenditure. In the first three quarters of 2021-2023, the company's ROE was above 15%. In terms of cash repayment, 2017-2023Q1, the company's revenue ratio is over 80%, and the net cash ratio is over 100% except for 22 years, and it has good repayment capacity. The ratio of the company's capital expenditure to depreciation and amortization has fallen below 100% in '22, and capital expenditure is relatively restrained.

The company is willing to pay dividends, and the high dividend policy is expected to continue. In 2022, the company's dividend rate (corresponding to the closing price of March 15, 2024) was 5.05%. The company is willing to pay dividends. In 2020-2022, the company's total cash dividends were 26/331/331 million yuan, respectively. The dividend payment ratio was greater than 50% and increased year by year. In 2022, the company's dividend payment rate reached 92.38%. We believe that the company's high-dividend policy is expected to continue.

Overseas markets continue to expand, and domestic business contributions to emerging fields are increasing. The four major foreign brands and Huarong Co., Ltd. are the main suppliers to the global explosion-proof electrical appliance market. Looking at the global competitive landscape, the top five explosion-proof electrical appliance companies in 2019 were Eaton, Emerson, Huarong Co., Ltd., Bartec, and R.Stahl in that order. The company's revenue share was about 5.55%. The company firmly pursues the “international expansion” strategy. 2023H1, the company's foreign trade revenue was 324 million yuan, up 22.13% year on year, the biggest increase in the same period in the past 3 years. Among them, projects in the Middle East region accounted for a relatively high proportion of revenue. The company's leading position in China is stable. In 2019, the domestic explosion-proof electrical appliance market share was about 21.8%. The factory sector is being promoted in emerging fields such as security intelligence, military industry, and nuclear power. In 2022, the national centralized control policy on safety risks in hazardous chemical parks was introduced. The company conservatively estimated the value of each chemical park's “intelligent safety risk management and control system” of 20 million yuan, and the market space for the application of safety engineering systems in hazardous chemical parks exceeded 10 billion yuan. The company is also further expanding the military and nuclear power markets, developing “internationally advanced and domestically leading” nuclear grade lighting products and military intelligent automation products.

Profit forecast, valuation and rating: Huarong Co., Ltd. is a global leader in explosion-proof appliances. The company operates steadily and has a strong desire to pay dividends; in addition, the company's main explosion-proof business is advancing in emerging fields and overseas, and has broad room for growth.

Maintain the 23-25 net profit forecast of 448/540/703 million yuan. The corresponding EPS was 1.33/1.60/2.08 yuan, respectively, and the corresponding PE was 15x/12x/10x, respectively. Maintain a “buy” rating.

Risk warning: the risk of macroeconomic fluctuations and changes in the level of downstream industry sentiment, the risk of increased market competition, the risk of price fluctuations of major raw materials, and the risk of fluctuations in overseas business demand.