Incident: Harbin Electric (1133.HK) announced its 2023 results. Revenue for 2023 was 28.841 billion yuan, yoy +17%, net profit to mother was RMB 575 million, yoy +482.69%. The performance was in line with expectations.

The sharp increase in the company's profits mainly benefited from a sharp reduction in credit impairment losses and an increase in investment returns. The company's credit impairment loss account in 2023 was +552 million yuan, compared to -332 million yuan in the same period last year, that is, the company's credit impairment loss account increased by 884 million yuan in 2023. In addition, the company's investment income increased by 223 million yuan in 2023, which we believe is mainly due to the company's transfer of 51% of the shares of Harbin Electric Power Equipment Co., Ltd. on November 28, 2023. According to the announcement of Jiadian Co., Ltd., the 100% equity value of Harbin Electric Equipment is 786 million yuan, with an estimated value-added value of 260 million yuan. According to this estimate, the company's revenue from the transfer of electric equipment to Kazakhstan is about 130 million yuan.

Power equipment revenue grew rapidly, but gross margin remained low, mainly due to the completion of previously low gross profit orders. In 2023, the company's revenue for new electric power equipment (coal power, gas power, hydropower, nuclear power equipment) increased 34% year on year, but the overall gross margin fell 0.8 percentage points year on year to 10.82%, and the gross margin of new power equipment was 12.33%, down 1.83 percentage points year on year. Among them, coal power 9.55, gas and electricity 5.37, hydropower 12.9, and nuclear power 26.98, were mainly affected by differences in product structure between years and the current low gross margin of finished products.

The company's orders continue to rise. In 2023, the company signed contracts amounted to 43.565 billion yuan, yoy +29.53%, of which new power equipment was 24.590 billion yuan, yoy +44.32% (coal power equipment 13.973 billion yuan, yoy +101.66%; hydropower equipment: 5.883 billion yuan, yoy +38.81%; nuclear power equipment: 1,982 billion yuan, yoy -41.77%; gas and electricity equipment, 1,687 million yuan, yoy -16.81%); green low-carbon drive equipment, yoy - 27.76%, mainly marine equipment growth); Clean and efficient industrial systems of 5.936 billion yuan, yoy +23.00%, mainly due to industrial petrochemical and valve pump business growth; general engineering contracting and trade of 6.957 billion yuan, yoy +22.68%, mainly overseas engineering upgrades; modern manufacturing service industry of 5,088 billion yuan, yoy +7.8%.

The company continues to make breakthroughs in the fields of photothermal power generation, compressed air energy storage, etc., while speeding up the increase in production capacity such as storage and nuclear power. In 2024, the capital expenditure was about 2,563 billion yuan. In 2023, the company signed contracts for photothermal power generation projects such as Hengji Energy Guazhou, Qingyu DC, and Xinhua Bozhou to achieve performance breakthroughs in key core equipment such as tower heat absorber systems, steam generators, and molten salt storage tanks; successfully signed an air turbine construction contract for the world's largest capacity 60 mW/600 MWH liquid bear compressed air energy storage demonstration project in Golmud, Qinghai. In addition, the company plans to invest 2,563 billion yuan in 2024 (1,501 billion yuan in 2023), mainly for technical improvement projects, basic nuclear power capacity improvement projects, pumped storage capacity improvement projects, national power generation equipment research center R&D base construction projects, and digital workshop construction projects.

In October 2023, the company completed a fixed increase of 1.7 billion domestic shares, and the majority shareholders' shareholding ratio increased to 69.79%. In December 2022, the company announced an increase of 1.7 billion yuan to the majority shareholders to promote business development. A total of 529.8 million new domestic shares were issued at an issue price of HK$3.60. The subscription for domestic shares was completed in October 2023. The total number of shares of the company was 2,236 million shares, including 1,561 million domestic shares and 676 million H shares. The issuance was completed, and the majority shareholder Harbin Electric Group's shareholding ratio increased from 60.41% to 69.79%.

Investment analysis: Considering the impact of the company's historical order prices and the decline in new nuclear power orders, we lowered the company's profit forecast for 2024-25 to $9.25/1,294 billion yuan (15.90/1,714 billion yuan before the reduction), and added the 2026 profit forecast to $1,548 billion. The current market value corresponds to the company's 2024-26 PE multiplier 5/4/3 times. Considering the reduction in profit forecasts, we downgraded the company's “gain” rating.

Risk warning: Risks such as power construction progress and order prices falling short of expectations, power plant renovation falling short of expectations, and higher risk of credit impairment than expected.