Incident: The company released its 2023 annual report. In 2023, it achieved revenue of 1,211 million yuan, +8.09% year-on-year, and realized net profit of 255 million yuan, or +1.45% year-on-year. Single Q4 achieved revenue of 283 million yuan, -6.97% year-on-year, and net profit of 47 million yuan, or -30.47% year-on-year.
Fluctuations in the company's performance are affected by cost plus prices on the one hand, and on the other hand, non-operating factors also put some pressure on them. In the second half of 2023, the company's revenue and net profit performance began to come under pressure. The revenue side of the company adopted a cost addition model. In the context of declining raw material costs in 2022 to 2023, the company will use annual pricing with long-term stable customers based on cost fluctuations; the profit side is affected by exchange losses and losses of participating subsidiaries: ① The company's exchange loss was 2.74 million yuan in 2023, and the revenue for the same period in 2022 was 21.436 million yuan; ② The holding subsidiary Liyuan Jinhe lost 17.31 million yuan, and the loss increased slightly year-on-year, due to a slight increase in production capacity over the same period last year. Accrued depreciation; ③ The investment of the participating subsidiary Liyuan Hydraulic lost 13.36 million yuan, an increase of 4.1 million yuan over the previous year, due to downward pressure on its downstream construction machinery industry.
The overall profit level of the company remains high and is expected to remain stable in 2024.
In 2023, the company's gross profit margin was 37.37%, +0.9pct year on year; net profit margin was 20.59%, -1.34pct year on year. The company's advantages in refined production process control are still outstanding. The gross margin remains at a high level. Price adjustments have not affected the company's gross profit margin, and the overall gross margin has increased due to product structure optimization and capacity utilization restoration in Liyuan Jinhe. From the cost side, the company's expense ratio for the 2023 period was 12.53%, compared to +2.22pct. Among them, sales, management, R&D, and finance expenses were +0.18pct, +0.11pct, and +1.09pct, respectively. During the period of capacity expansion, the management expense ratio increased relatively significantly, and the financial expense ratio was mainly affected by exchange gains and losses. Looking ahead to 2024, we expect the company's profit level to remain stable. The main factors to consider are as follows: ① Among them, the Liyuan Jinhe technical improvement project has reached production and utilization efficiency has been improved. Liyuan Hydraulic has launched new products through early R&D, and is expected to reduce losses through steady expansion of business scale in the future; ② the new production capacity of the company headquarters will lead to a certain amount of depreciation growth.
The expansion of production capacity lays the foundation for long-term growth, focusing on the expansion of new fields and new customers in overseas markets. By the end of 2023, the company had 10 CNC machining workshops, 133 large-scale machining centers, and an annual casting capacity of 70,000 tons. The company's plans for additional production capacity are clear:
① The subsidiary Zhejiang Mingde's “High-precision Mechanical Parts Production and Construction Project” is progressing steadily.
By the end of 2023, the main building of the project had been basically completed, and the relevant equipment was being implemented, installed and commissioned steadily. According to the company's annual report, the project corresponds to about 370 million yuan of projects under construction, and the project progress reached 80%. ② The company invested in the establishment of a Mexican subsidiary and has begun preparations for plant construction. The construction period is expected to be 2 years, and the annual production capacity of 38,000 pieces of precision components will be formed after delivery, including compressors, construction machinery, and agricultural machinery parts. The purpose of building new production capacity is to further enhance the company's cooperation with downstream customers in the global market. The company's products have gradually been extended from compressors and construction machinery to agricultural machinery and energy equipment (including wind energy equipment, shale oil extraction equipment, oil and gas collection equipment), and it is expected to continue to open up the company's potential market.
Investment advice:
The company's revenue for 2023-2025 is estimated to be 15.22/1,852,267 billion yuan, respectively, with year-on-year growth rates of 25.6%/21.7%/22.4%, respectively, and net profit to mother of 3.08/3.81/482 million yuan, respectively. The year-on-year growth rates are 22.7%/23.4%/26.6%, respectively, and the corresponding PE is 13.7/11.1/8.8 times, respectively. In 2024-2026, the company is expected to enter a phase of concentrated production capacity release. Along with the fulfillment of new customers and expectations in new fields, it is expected that profitability will be steady and growth will continue. 16X PE will be given in 2024, corresponding to a target price of 20.48 yuan for 6 months, maintaining a “buy-A” rating.
Risk warning: Raw material prices fluctuate greatly; downstream demand declined due to economic recovery falling short of expectations; capacity expansion fell short of expectations; loss of important customers; business development of acquisitions and participating companies fell short of expectations.