Net profit to mother in '23 was +29.03% YoY, maintaining the “Buy” rating and achieving revenue/net profit of RMB 24.14/218 million, YoY -10.51%/+29.03% YoY. Net profit to mother was in line with our expectations (RMB 218 million), of which 23Q4 achieved revenue/net profit of 9.97/111 million, or -7.72%/+52.8% YoY. 24Q1 achieved revenue/net profit to mother of 308.034 million yuan, -16.12%/+1.84% year-on-year. Taking into account the slight increase of 0.53% year-on-year in new orders signed by the company in 2024-2026, we adjusted the company's net profit forecast for 2024-2026 to 2.53/2.90/324 million (2.74 billion yuan in 24-25 years ago). The company's grain and oil cold chain service industry benefits from strategic safety needs, has a good medium- and long-term prosperity, and is recognized as 25xPE in 24, and adjusted the target price to 12.37 yuan (previous value of 14.03 yuan) to maintain “purchase” ratings.

The improvement in gross margin of the mechanical and electrical engineering and equipment manufacturing business led to a significant increase in comprehensive gross margin by sector. In '23, revenue from grain and oil processing/cold chain logistics was 20.1/380 million, -7.7%/-23.7% YoY, and a gross profit margin of 23.0%/31.9%, +5.0/+0.8pct. By business, design consulting/mechatronic engineering/equipment manufacturing revenue in 23 years was 6.1/1.07 billion, +1.7%/-19.6%, gross profit margin 42.7%/17.3%/20.2%, year-on-year, -1.1/+2.5/+7.8pct. The high-margin design business increased slightly, and the gross margin of mechanical and electrical engineering and equipment manufacturing increased significantly, driving 23 comprehensive gross margin +4.0pct to 24.7% year over year. 24Q1 gross profit margin 26.7%, +3.16pct year over year, +1.72pct month-on-month.

Net interest rate due to mother increased markedly, and operating cash flow improved year-on-year

The cost rate for the 23-year period was 12.2%, compared to +1.6 pct. It was mainly affected by the increase in R&D expenditure and the decline in revenue scale. Among them, the sales/management/ R&D/ finance ratio was 1.0%/6.3%/5.6%/-0.6%, respectively, +0.01/+0.24/+1.32/+0.05pct. R&D expenses were +17.5% year-on-year, and sales, management and financial expenses declined year-on-year. The ratio of impairment expenses to revenue in '23 was -0.5 pct to 1.9% year on year, net interest rate of 9.0% to mother in '23, +2.8 pct year on year, 9.6% year on year 24Q1, +1.7 pct year on year, and +0.6 pct month-on-month. Net operating cash flow in '23 was 430 million yuan, an increase of 30 billion yuan year-on-year, mainly due to a significant increase in the cash-on-to-cash ratio and a decrease in the pay-as-you-go ratio. The payment/ payout ratio was 114.2%/87.8%, +20.2/-0.8 pct year on year.

Benefiting from the food security strategy, the business extended to the industrial chain. Driven by food security, granary construction ushered in a peak period and intensification of grain and oil processing continued to increase. It is expected that the “14th Five-Year Plan” will maintain relatively rapid growth. In June 2023, the “National Modern Facility Agriculture Construction Plan (2023-2030)” was issued, requiring the construction of a total of 60,000 storage and preservation facilities by 2030, and the continuous completion of the renovation and upgrading of a number of old food drying centers (points). We believe that as a national team in the field of grain and oil innovation, the company relies on the COFCO Group and has a strong competitive advantage among downstream state-owned enterprise customers. During the “14th Five-Year Plan” period, it is expected to benefit from food security strategies, extend its own business to the industrial chain, and have a clear future development path.

Risk warning: Investment in the grain and oil sector falls short of expectations; the conversion rate from design to mechanical and electrical engineering falls short of expectations.