1. Incidents

In 2023, the company achieved operating income of 3.18 billion yuan, an increase of 15.9%; net profit to mother was 410 million yuan, an increase of 51.1% year on year; and realized non-net profit deducted from mother of 360 million yuan, an increase of 27.0% year on year.

In the first quarter of 2024, the company achieved operating income of 720 million yuan, a year-on-year increase of 12.5%; net profit to mother of 100 million yuan, an increase of 22.0%; and realized deducted non-net profit of 90 million yuan, an increase of 35.4% over the previous year.

2. Revenue side: Policies favor catalytic demand, and smart gas and water services drive performance growth.

Demand continues to unleash, and revenue continues to grow. The company's revenue in 2023 reached 3.18 billion yuan, up 15.9% year on year; net profit to mother was 410 million yuan, up 51.1% year on year.

By product: The civil gas market has been released steadily, industrial and commercial demand has recovered, and smart water services have achieved high growth. Among the company's four major products,

(1) Intelligent civil gas terminals and systems, focusing on favorable policies for the renovation of old pipelines and the construction of urban gas lifeline safety projects, and steady growth in performance. In 2023, we achieved revenue of 1.86 billion yuan, a year-on-year increase of 16.3%, gross profit margin of 37.8%, and a year-on-year increase of 6.9 pcts, mainly due to urban village renovation and mandatory renewal and replacement of cyclical gas meters to catalyze a new round of inventory replacement needs.

(2) Customer demand for intelligent industrial and commercial gas terminals and systems has recovered, and performance is growing steadily. Revenue of 660 million yuan was achieved in 2023, up 8.1% year-on-year, mainly due to a steady recovery in the economy, effective implementation of a gas price linkage mechanism, and a recovery in customer demand.

(3) Intelligent water terminals and systems ushered in a period of rapid development opportunities. Revenue of $280 million was achieved in 2023, up 53.2% year over year. Significant business progress has been achieved in important markets such as Beijing, Shanghai, and Guangzhou, and has developed strategic cooperation with multinational companies such as SUEZ and Grundfos in the fields of smart water and smart pump houses.

(4) Smart utility management systems and others. In 2023, we achieved revenue of 370 million yuan, an increase of 8.4% year on year, gross profit margin of 40.5%, and an increase of 5.8 pct year on year.

Accelerate the layout of domestic and foreign markets, and increase steadily in domestic and foreign sales revenue. In 2023, the company's domestic revenue was 3.08 billion yuan and overseas revenue was 100 million yuan, up 15.5% and 29.5% year-on-year respectively. By the end of the reporting period, the company had established business relationships with more than 40 countries and regions, expanding the scale of overseas sales of digital gas while also entering the digital water service scenario into overseas markets.

3. Cost and expense side: Increase smart water sales efforts, with significant cost reduction and efficiency results. The gross sales margin in 2023 was 42.3%, an increase of 4.1 pct over the previous year; the net profit margin on sales was 13.2%, up 3.2 pcts year on year. Mainly companies reduce product costs through measures such as design improvements and material procurement cost reduction.

The overall cost rate for 2023 was 29.5%, an increase of 1.8 pct year-on-year. Among them, the increase in the sales expense ratio is mainly due to the company increasing its investment in sales.

4. Shareholder returns continue to increase, and Q1 repurchases increase confidence

According to the company's 2023 annual report, the company achieved net profit of 410 million yuan in 2023. It is planned to distribute a cash dividend of 5 yuan to all shareholders for every 10 shares based on the company's total share capital of 410 million shares that have been repurchased, and a cash dividend of 210 million yuan is expected.

According to the company's quarterly report, about 2.09 million shares of the company were repurchased in this period, accounting for 0.5% of the company's total share capital. The highest transaction price was 13.2 yuan/share, the lowest transaction price was 11.7 yuan/share, and the total amount paid was 0.3 billion yuan (excluding transaction fees).

5. Forward-looking layout of hydrogen energy and process metering, broad development space

The domestic substitution process is accelerating, and there is huge room for hydrogen energy measurement development.

Breaking the traditional metering company position, the company gradually built four major platforms based on the gas meter metering industry.

6. Investment advice:

As a leading company in the metrology industry, the company's gas and water business is developing well, and the profit forecast is adjusted. It is estimated that the revenue for 2024-2026 will be reduced from 3908/46.44/N/A 100 million yuan to 37.18/43.56/5.121 billion yuan, respectively. Earnings per share are expected to increase from 1.10/1.33/N/A to 1.16/1.38/1.65, respectively, corresponding to the closing price of 13.33 yuan/share on April 18, 2024. PE is 11.52/9.67/8.06 times, respectively, maintaining the “buy” rating.

7. Risk Warning:

The impact of the renovation of old neighborhoods and gas distribution policies, the development of gas meter and flow meter businesses falling short of expectations, and the penetration of IoT technologies such as water or gas companies falls short of expectations and systemic risks.