Incidents:
China Western Electric released its 2023 annual report on April 11, 2024: In 2023, the company achieved revenue of 21.1 billion yuan, +12%; net profit to mother of 890 million yuan, +43% year on year; net profit after deduction of 6.4 billion yuan, +142% year on year; gross profit margin 17.8%, +1.4pct year on year; net profit margin 4.9%, +0.9 pct year on year; net profit margin 3.0%, year on year +1.6 pct year on year.
Among them, 2023Q4 had revenue of 7.2 billion yuan, +62% month-on-month, +34% year-on-year; net profit of 360 million yuan, +267% month-on-month, +144% year-on-year; net profit net profit of 190 million yuan, +201% month-on-month, +253% year-on-year; gross profit margin 19.9%, +2.6pct month-on-month, +2.5pct year-on-year; net profit margin of 5.5%, month-on-month +1.7pct.
Investment highlights:
In 2023, transformer and switch revenue grew rapidly, and the gross profit of the switch and engineering trade business increased significantly. In 2023, the company achieved transformer revenue of 7.8 billion yuan, gross profit margin of 8.5%, year-on-year -0.9 pct; switch 7.7 billion yuan, +22% year-on-year, gross profit margin of 25.2%, +2.2pct year on year; power electronics and engineering trade of 3.7 billion yuan, -30% year-on-year, gross profit margin of 15.8%, year-on-year +5.4pct. The company's revenue growth is mainly due to the company continuing to strengthen and improve the transmission and transformation market, leading to an increase in revenue from transformers and switches (combined appliances, circuit breakers). Changes in the gross margin of various businesses are closely related to the product structure. Among them, the share of high-margin UHV and DC products in transformers declined, the share of high-margin switching products increased, and the share of revenue from high-margin products in power electronics and engineering trade increased.
Quality orders for domestic power grids increased dramatically in 2023, and 2024 is expected to usher in a significant improvement in profits. The number of new contracts signed in the State Grid market increased dramatically over the same period last year. The market share of UHV projects maintained its leading position in the industry, and the increase in the share of the State Grid batch market ranked first in the industry over the same period last year. According to our statistical analysis of the State Grid public tender data, the company's high-margin power grid transformer orders increased dramatically in 2023, winning the bid for 5.9 billion transformers for transmission, transformation and UHV procurement, which was nearly +450% over the same period last year, including 2 billion for transmission and transformation, and 3.9 billion for UHV. The company's high-margin grid switch orders also grew rapidly. It won the bid for 4.4 billion combined electrical appliances purchased by power transmission, transformation and UHV (excluding the newly allocated Hengchi Electric), +94% year-on-year, including 2.6 billion yuan for power transmission and transformation, +68% year over year; UHV 1.8 billion, +247% year over year. In addition, the company won a bid of 970 million yuan for the converter valve. The State Grid power transmission and UHV projects are high-quality orders, which will greatly improve the revenue structure of the company's transformer and switch business, thereby increasing the company's profit level.
In 2023, the company's international market business increased in quality, and its international influence continued to increase. The total number of new equipment export contracts signed by the company doubled, winning bids for the 400 kV substation in Bangladesh and the Saudi State Grid project, making it the largest overseas order for combined electrical equipment in recent years. The general engineering contract business achieved another breakthrough and successfully entered the African new energy market. Jointly build the “Belt and Road” from a high level and a high starting point, signed a memorandum of cooperation with the Egyptian Electric Power Holding Company to upgrade the distribution network, and signed a framework agreement with the National Distribution Grid Corporation of Uzbekistan for the construction of 100 substations. International influence continues to grow; for example, reports on the Armenian substation project have aroused strong reactions.
Profit forecast and investment rating: The company is in a period of improvement in business structure and management, and profits are expected to improve significantly. It is estimated that in 2024-2026, the company is expected to achieve operating income of 239/272/30.6 billion yuan, and net profit to mother of 15/20/24 billion yuan. The PE corresponding to the current stock price is 25X, 19X, and 16X, respectively, covered for the first time, giving it an “increase in weight” rating.
Risk warning: core competitiveness risk, business risk, industry risk, macro-environmental risk, overseas market expansion risk, raw material fluctuation risk.