Event Overview: On March 29, the company released its 2023 annual report: In 2023, the company achieved revenue of 6.661 billion yuan, up 7% year on year; net profit to mother of 783 million yuan, up 66.2% year on year; net profit after deducting non-return to mother of 695 million yuan, an increase of 54.7% year on year. With 2023Q4, the company achieved revenue of 1,546 billion yuan, a year-on-year decrease of 10.9% and a decrease of 6.7%; net profit to mother of 161 million yuan, an increase of 29.4% year-on-year and a decrease of 5.8% month-on-month; net profit after deducting non-return to mother of 119 million yuan, an increase of 6.3% year-on-year and a decrease of 32.6% month-on-month.

Comment: Production and sales increased year on year, and gross margin increased year on year

① Volume: Production and sales increased year-on-year in 2023. The company's world-leading PQF production line has greatly increased the company's pipe production capacity since it was put into operation in 2021, compounded by the increase in foreign trade market demand in the oil and gas industry and the recovery in demand for coal-electric boilers. In 2023, the company's seamless pipe production reached 770,000 tons, up 2.41% year on year; seamless pipe sales reached 787,800 tons, up 11.83% year on year, and the company's production and sales scale reached a record high.

② Price: Gross margin increased year-on-year in 2023. In 2023, the price of seamless steel pipes decreased by 12.21% year on year, while the price of raw material tube billets decreased by 13.23% year on year, and the company's gross margin increased by 3.78 pct to 18.76% year on year.

Among them, the gross margins of oil casings and boiler tubes were 22.62% (+3.39pct) and 17.25% (YoY +4.21pct), respectively. 2023Q4's gross margin was 18.49%, up -1.8pct month-on-month and -1.3pct year-on-year.

Future core focus: Advanced production capacity continues to be released, and new energy vehicle pipe production lines are being built ① Demand for oil, gas and thermal power boiler tubes remains high. In terms of oil and gas pipelines, the company seizes opportunities for industry market recovery, focuses on foreign market development and certification, and actively expands overseas markets. In terms of thermal power boiler tubes, the National Development and Reform Commission held a coal insurance and supply conference in September 2022, it was proposed that 165 million kilowatts of new thermal power will be started in 2022 to 2023, and the company's demand for thermal power boiler tubes will be boosted.

② The company's advanced production capacity continues to be released. The company introduced the world's first latest technology PQF continuous rolling mill designed and manufactured by Seamark, Germany, and put into trial operation on June 18, 2021. The company currently has a production capacity of 1 million tons of small to medium caliber special pipes, which supports the continuous growth of the company's production and sales against the backdrop of good downstream demand.

③ Expand high-end business. The company plans to build a precision pipe production line for new energy vehicles with an annual output of 50,000 tons. The total investment of the project is estimated at 520 million yuan. It is estimated that the project will increase annual revenue of 525 million yuan after delivery, with a total annual profit of 63.07 million yuan, and an IRR of 11.65% after tax. At the same time, the company plans to build a new energy and semiconductor specialty materials project with an annual output of 8,500 tons. The estimated fixed asset construction investment is 506 million yuan. It is expected to increase annual revenue of 790 million yuan after delivery, with a total annual profit of 105 million yuan, and an IRR of 18.2% after tax for the project.

Profit forecast and investment advice: We believe that benefiting from rising demand in the oil and gas industry, the continuous release of new production capacity, and declining raw material prices, the company's sales volume and gross margin of steel pipe products are expected to increase. Net profit to mother for 2024-26 is expected to be 7.10/7.99/825 million yuan in sequence. PE corresponding to the closing price on March 29 is 8x, 7x, and 7x, maintaining the “recommended” rating.

Risk warning: Prices of raw materials have risen, downstream demand falls short of expectations, and capacity release falls short of expectations.