Core views
Relying on accurate metering+digitalization, the company lays out two major application scenarios for digital gas and digital water services, and is gradually expanding to new scenarios such as hydrogen energy and process metering. The company's gas side grew steadily in 2023, and the revenue growth rate of the water business exceeded 50%; with the rapid expansion of the profit side, the company's dividend ratio increased to more than 50% in 2023. Under the old network management renovation and equipment renewal policy, gas and water services are expected to continue to be booming in 2024; in the long term, as long-term pipeline products and hydrogen energy measurement become more mature, the company is expected to usher in historical opportunities to replace domestic production.
occurrences
In 2023, the company achieved revenue of 3.175 billion yuan, +15.91% year on year; net profit to mother of 409 million yuan, +51.09% year on year; net profit after deducting non-return to mother of 358 million yuan, +27.04% year on year. In the fourth quarter of 2023, we achieved revenue of 894 million yuan, +11.59% year over year; net profit to mother was 111 million yuan, +25.21% year over year; net profit after deducting non-return to mother was 96 million yuan, +13.04% year over year.
In the first quarter of 2024, the company achieved revenue of 719 million yuan, +12.48% year on year; net profit of 99 million yuan, +22.03% year over year; net profit after deducting non-return to mother of 85 million yuan, +35.36% year on year.
Brief review
1. Revenue grew steadily in 2023, and the smart water business continued to expand rapidly. Relying on accurate measurement and IoT digital technology, the company laid out two major application scenarios for digital gas and digital water, and gradually expanded to new scenarios such as hydrogen energy and process metering. In 2023, the company's overall revenue increased 15.91% year on year, continuing the rapid growth since 2021; among them, digital gas revenue increased steadily, and digital water revenue continued to grow at a high rate. 1) By business: smart civil gas terminals and systems revenue +16.25% to 1,864 billion yuan, accounting for 58.72% of revenue; smart industrial and commercial gas terminals and systems business revenue +8.12% to 658 million yuan, accounting for 20.74% of revenue; smart water terminals and systems business increased sharply by 53.22% to 279 million yuan year-on-year, and revenue share increased 2.14 pct to 8.79%. Mainly, the company strengthened marketing expansion to achieve shortlisting and order conversion for key customers; smart utility management system business revenue + 8.36% to $373 million.
2) By region: The company is headquartered in Hangzhou and has been deeply involved in the East China market. In 2023, the East China region's revenue was +3.34% to 1,124 billion yuan, accounting for 35.41% of revenue; North China, South China, and Central China accounted for 18.72%, 12.05%, and 10.04% of total domestic revenue respectively, accounting for 96.84% of total domestic revenue.
The company has set up an independent overseas marketing center to promote and replicate mature domestic IoT solutions to overseas markets, and has established business relationships with more than 40 overseas countries; in 2023, the company's overseas revenue was 100 million yuan, a significant increase of 29.54% over the previous year, accounting for 3.16% of revenue.
2. The comprehensive gross margin increased significantly in 2023, and the dividend ratio increased to more than 50%. In 2023, the company's comprehensive gross margin increased 4.09pct year-on-year to 42.31%, mainly due to a significant recovery in the gross margin on the civil gas side. The gross margin of civil gas terminals and systems in 2023 is +6.86pct to 37.77% year over year, mainly due to falling electronic material costs and the company's active cost reduction. The gross margin was significantly restored from about 30% in 2021-2022, and there is still room for improvement from about 41% in 2019-2020; the gross margin of the industrial and commercial gas business is -0.44pct to 58.24% year on year, leading profitability among major business lines; the gross margin for water services is -3.34pct to 37.47% year-on-year.
The R&D cost rate fluctuated greatly in the company's cost rate over the past period, and has been relatively stable for the past 2 years. The company's expense ratio increased by 1.79pct to 29.49% during the 2023 period, of which the sales expense ratio increased by 1.14pct to 18.02%. Net interest rate increased by 3.19pct to 13.23% in 2023, showing a fluctuating upward trend in the past 3 years.
In the first quarter of 2024, the company's revenue and profit increased steadily, with gross margin increasing by 0.76pct to 40.93% year on year; expenses for the period increased slightly by 0.35pct to 29.45%; net margin increased 1.16pct to 14.28% year on year, up 1.04pct over the full year of 2023. The company reduces product costs through measures such as R&D and design improvements and material procurement cost reduction, and the profit level is expected to continue to rise throughout the year.
Shareholder return: The company's proposed cash dividend amount reached 207 million yuan in 2023, a sharp increase of nearly 4 times over the previous year, and the dividend ratio increased from 15.35% in 2022 to 50.65% in 2023. The net cash flow from the company's operating activities in 2023 was 428 million yuan, an increase of 28.98% over the previous year. Sufficient cash flow, which is highly compatible with the profit side, provides the foundation for increased shareholder returns.
3. Digital gas: Instrument+software services provide overall solutions, benefiting from old pipeline network renovation+equipment renewal policies. The company provides cloud-based IoT platforms through the production and manufacture of gas meters+software services to provide customers with overall solutions for the sensing layer, collection layer, and application layer. Referring to the company's 2019 data, instrumentation revenue contributed 48.18%, with a gross profit margin of 30.25%; software and information technology services accounted for 43.95% of revenue, with a gross profit margin of 68.00%. Software services significantly increased the added value of the company's business compared to traditional instrument hardware business. According to the Ministry of Housing and Construction's “2022 Urban Construction Statistics Yearbook”, the number of urban natural gas gas users in China is 204 million, of which 200 million households are residents, and the number of gas meters owned is huge. Assuming 1 gas meter per household, calculated according to a 10-year mandatory replacement cycle, the inventory renewal market will contribute an average of about 20 million gas meters per year. Real estate construction in China was at its peak 10 years ago (around 2014). With the support of the renovation of old pipelines and current equipment renewal policies in recent years, the company's digital gas business is expected to fully benefit.
4. Digital water services: Vigorously explore the market and create a second growth curve. The water meter replacement cycle is short, and the intelligent space is broad. According to data from Intelligent Research Consulting, China's water meter production in 2022 was 10,589 million units, of which 40.47 million were smart meters, with a smart water meter penetration rate of about 37.82%; the “Outline of the 14th Five-Year Plan for China's Water Meter Industry” indicates that the penetration rate of smart water meters will be increased to 60% by 2025, and there is a lot of room for improvement in the long term compared to the current 80% penetration rate of smart gas meters. China's 25mm and below caliber water meters should not be used for more than 6 years, and 25-50mm large caliber meters should not exceed 4 years; China still has many overdue water meters, and the leakage rate is high, so the demand for water meter replacement is expected to be released more fully under the equipment renewal policy.
Based on accurate metering+IoT digital technology, the company replicated its experience in the gas field to the water market to achieve shortlisting and order conversion for key customers. In 2023, it reached cooperative relationships with group customers such as Beijing Water Supply Group, Shanghai Chengtou Water, Guangzhou Water Supply, China Environmental Water Investment, and China Water Investment. In 2021-2023, the revenue growth rate of the company's smart water terminals and systems reached 87.67%, 65.59%, and 53.22% respectively; the water meter industry is showing a clear trend of renewal and replacement+intelligence. The company follows the trend to explore the digital water market, and the business is expected to continue to grow rapidly.
4. Transferring horizontal scenarios around metering+digitization, the potential for long-term pipeline+hydrogen energy measurement is huge, and continuous investment in R&D and development of the first product in the industry to solve customer pain points is an important reason why the company's leading position has been stable for a long time. Currently, the company's hydrogen energy measurement solutions are centered on TGC online gas chromatography analyzers, equipped with TUS ultrasonic flowmeters, etc., and can be widely used in trade scenarios such as plant handover and long-distance pipelines. The company's TUS ultrasonic gas flowmeter was awarded an OIML 0.5 certificate by NMI. The TBQM gas turbine flowmeter is the only domestic enterprise that has passed hydrogen mixing tests such as 5%, 10%, 15%, and 30%. It has reached the international advanced level and promoted the development of hydrogen mixing measurement in China. As long-distance pipeline products and hydrogen energy metering become more mature, and continue to break through downstream customers, the company is expected to welcome opportunities for domestic substitution.
Investment advice: The company is expected to achieve revenue of 36.56, 41.93 and 4.796 billion yuan respectively, and net profit to mother of 4.84, 5.61, and 646 million yuan respectively, +18.49%, +15.83%, and +15.11% year-on-year, corresponding to the 2024-2026 dynamic PE of 11.77, 10.16, and 8.83 times, respectively, and upgraded to “buy”.
Risk analysis
1) Risk of declining demand in the new real estate market
Demand for gas meter products is composed of a combination of new markets and demand for stock renewal and transformation. The market space for stock renewal and replacement is large and sustainable, benefiting from old pipeline network transformation and equipment renewal policies; however, there is a certain correlation between new market demand and real estate sales. If real estate sales continue to decline in the future, the growth rate of new product demand will slow down, causing the industry to face the risk that the overall demand growth rate will be pressured.
2) Risk of increased market competition
The company's comprehensive IoT solutions have leading advantages in the industry, but with the development of IoT technology, competitors have adjusted their strategic layout, accelerated technology upgrades, and competed with the company in the IoT field. Furthermore, the company has stepped up its pioneering efforts in the water sector in recent years, and its performance continues to grow.
However, as the company's market share gradually increases, it will face more competition from peers. If the competitive pattern in the market deteriorates further, the company will face the potential risk of price cuts and declining profit levels.