Huarong Co., Ltd.: The company is a leading domestic explosion-proof electrical appliance. Its main business is the production, sales and service of explosion-proof electrical appliances and related intelligence/information technology products; professional lighting equipment production and sales; and new energy EPC general contracting. Currently, orders in various fields such as photovoltaics, safety, pyrotechnics, military industry, nuclear power, and foreign trade are full, and performance growth is visible. From 2021 to 2023, the Group's revenue was 30.27/30.43/3.197 billion yuan respectively, with year-on-year growth rates of 32.62%/0.52%/5.06%, respectively, and net profit to mother of 3.81/3.58/ 461 million yuan, respectively, with year-on-year growth rates of 46.19%/-6.01%/28.73%, respectively.

Net profit to mother increased by 28.73% year-on-year in 2023. The company's various businesses developed steadily in 2023, achieving annual revenue of 3.197 billion yuan, up 5.06% year on year, achieving net profit of 461 million yuan, up 28.73% year on year, net profit after deducting 453 million yuan, an increase of 26.47% over the same period last year. The company's cost rate for the period was 36.10%, up 1.96 pcts year on year. Among them, the sales/management/R&D/finance expenses ratio was 26.87%/5.27%/4.43%/-0.27%, respectively, and the year-on-year change was -0.82/+0.21 pcts. The change in expenses during the period was mainly due to an increase in employee remuneration, service and consulting expenses, and a decrease in exchange earnings.

The main business explosion-proof products are growing steadily, and overseas markets are expanding at an accelerated pace. By product, 1) The main explosion-proof product revenue in 2023 was 2,602 billion yuan, up 14.27% year on year, and gross margin was 57%, up 0.3 pct year on year. The main business continued to maintain a steady development trend, achieving both business and profit growth. 2) The engineering business achieved revenue of 274 million yuan, a year-on-year decrease of 44%. The main reason was that new energy EPC projects were affected by approval procedures, so there was no confirmed revenue for the first three quarters of 2023. At the same time, gross margin increased from 15.3% in 2022 to 25.2% in 2023, mainly due to a sharp drop in PV module prices. The share of engineering revenue in total revenue fell from 16% to 9%. 3) Professional lighting and other products achieved revenue of 321 million yuan, an increase of 11% over the previous year, and the gross margin of professional lighting was 56.6%, a year-on-year decrease of 3.5 pct. It is expected to maintain a moderate growth trend in the future. According to domestic and foreign trade, domestic trade/foreign trade revenue in 2023 was 2.5/7 billion yuan respectively, of which foreign trade increased by about 11% year-on-year. The company accelerated its foreign trade business layout and successively established and put into operation three overseas operation centers in Europe, Central Asia and Southeast Asia; the company's joint venture in Saudi Arabia entered the registration review stage.

Investment advice: We expect net profit attributable to the parent company from 2024 to 2026 to be $533/6.19/721 million yuan, respectively, corresponding to 14/12/10 times PE. The one-year reasonable valuation is 26.87-28.45 yuan, which is covered for the first time and gives a “buy” rating.

Risk warning: raw material prices fluctuate; new product promotion falls short of expectations; exchange rate fluctuates greatly.