Event: The company publishes its 2023 annual report. During the reporting period, revenue of 1,029 billion yuan was achieved, up 35.4% year on year; net profit to mother was 86.68 million yuan, up 48.02% year on year; non-net profit deducted from mother was 807.515 million yuan, up 54.16% year on year. The overall results were in line with expectations.

Coal and power construction has opened up market space, and the auxiliary equipment business continues to grow. The company's traditional business includes slag removal equipment and low-temperature coal savers, which are essential auxiliary equipment for coal power. They have significantly benefited from the new expansion of coal power, and the market space is broad. The total amount of basic investment in thermal power in 2023 was 102.9 billion yuan, +15% year-on-year; the country's installed capacity of thermal power was 1,390 billion kilowatts, an increase of 4.1% over the previous year. According to Greenpeace statistics, 2023H1 has approved a total of 50.4 million kilowatts of coal and electricity installed capacity nationwide, which has reached 55.56% of the approved installed capacity for the whole of 2022, far exceeding the total amount approved in 2021. Benefiting from the construction of new coal and electricity, the company's low-temperature flue gas waste heat deep recovery system business revenue reached 245 million yuan, +100.1% year over year, gross margin +6.94 pct; dry slag removal equipment revenue was 293 million yuan, +28.06% year over year, and gross margin -1.6 pct.

Full-load denitrification fluctuates in the short term, and demand for flexible transformation continues to be released. The company has mastered the core technology of thermal power flexibility transformation. The compound revenue growth rate of the representative business reached 60.54% from 2018 to 2022. It has maintained a high growth rate, or was affected by the pace of demand release and order confirmation revenue. The business's revenue ratio in 2023 was -25.24%.

In January 2024, the National Development and Reform Commission and the National Energy Administration's “Guiding Opinions on Strengthening Capacity Building for Peak Shifting and Energy Storage in Power Grids” proposed to carry out in-depth flexibility transformation of coal power units to achieve “thorough reform” by 2027; explore deep peak shifting of coal power units on the premise of ensuring safety in regions with a high share of new energy and insufficient peak shifting capacity, and the minimum power generation output reaches 30% of the rated load. We expect that with the shift from thermal power to regulated power sources and profit improvements, demand for flexible transformation will continue to be released, and related businesses still have potential for elastic growth.

Emerging businesses such as steel slag and desulfurization wastewater treatment grew, creating a new growth curve. In 2023, the company landed its first order in the steel slag business, with a contract amount of 104 million yuan and confirmed revenue of 92 million yuan, indicating that the company has successfully opened up the steel slag treatment market and laid out energy-saving transformation in the non-electric industry, which is expected to create new growth space for the company. In addition, the company also lays out emerging businesses such as clean energy consumption and desulfurization wastewater treatment. In 2023, the zero discharge system for desulfurization wastewater achieved revenue of 0.19 million yuan, +36.41% over the same period last year. It is expected to continue to expand in the future, supporting additional room for the company's future performance.

Investment advice. The company's auxiliary equipment performance maintained a relatively rapid growth rate in 2023, but the full-load denitrification business lowered performance expectations due to demand release and order pace falling short of expectations. As a leader in the coal power auxiliary equipment and thermal power flexibility transformation segment, it directly benefits from the opening up space for new coal power construction and thermal power flexibility transformation, and the continuous release of market demand supports the continuous improvement of the company's profitability. We predict that the company's net profit for 2024-2026 will be 1.50/1.90/233 million yuan respectively, corresponding EPS will be 1.22/1.54/1.89 yuan, and PE will be 11.6/9.1/7.4 times, respectively. The company has the core advantage of thermal power flexibility transformation and rapid growth, and maintains a “buy” rating.

Risk warning: 1. Thermal power construction falls short of expectations. 2. The electricity auxiliary services market policy falls short of expectations. 3. Demand for thermal power flexibility transformation fell short of expectations.