Investment logic:
Based on mining and heavy equipment, net profit returned to mother in '23 reached an inflection point. The company's main business is mining and heavy equipment, and revenue increased from 4.62 billion yuan to 9.56 billion yuan in 17-23. Driven by overseas business in '23, net profit to mother increased sharply to 380 million yuan, +163.5% year-on-year.
The company's net operating cash flow in 2021-2023 was 6.8/12.1/1.2 billion yuan respectively, far exceeding current net profit, showing excellent operating capacity. The company's balance ratio fell from 63.9% to 55.1% in 2019-2023, and the continuous optimization of the balance and liability structure is conducive to profit release.
Metal prices remain high, Chinese miners are going overseas, and demand for mining equipment is high. (1) The copper and gold price indices reached 672.0 and 410.3 in 23. Compared with the previous capital expenditure cycle, metal prices have surpassed the high point of the previous upward cycle, but the capital expenditure of the world's top 30 mines was only US$107.40 billion and has not recovered to its previous high (US$145.02 billion). We believe that the high price of major metals is expected to continue to catalyze capital expenditure to remain high. (2) Foreign investment in China's mining industry increased from US$4.63 billion to US$15.10 billion in 2018-22. The CAGR reached 34.4% during this period. China's overseas mining industry is expected to drive an increase in demand for domestic equipment.
Leading domestic large-scale mining mills, the global share is expected to increase further. In 21-23, the company's R&D investment intensity was 6.9%/7.2%/7.1%, far exceeding that of domestic metallurgical mining equipment enterprises. Benchmarking overseas leaders: (1) Technology: Key parameters such as diameter and power of large-scale equipment are benchmarked or surpassed by overseas leader Metso; (2) Status: According to the company's official account information, the domestic/global market share of the company's mining mills with a diameter of 6 meters or more in '21 exceeded 81%/23%. In recent years, the company and Chinese mining companies have joined forces to go overseas on the “Belt and Road”, and the overseas revenue/share increased from 710 million yuan/11.3% in 20 to 2.13 billion yuan/22.3% in 23. Overseas gross margin broke a new high in '23. Overseas gross profit reached 760 million yuan, +215.3% over the same period, and the proportion of the company's total gross profit increased to 40.4%. However, compared to leading foreign investors, there is still plenty of room for improvement in the company's revenue scale. With the deepening of cooperation on mineral resources in the “Belt and Road” region, the company's global share is expected to increase further.
Targeted expansion of production capacity for panel boxes and wear-resistant parts. In May 2021, the company issued an initial plan for additional distribution. According to the company's announcement, the company's targeted increase was approved in October 23. It plans to issue 400 million additional shares, raise no more than 829 million yuan, expand the production capacity of panel boxes and high-end wear-resistant parts by 1.24 and 15,000 tons/year, and production capacity bottlenecks are expected to ease.
Profit forecasts, valuations, and ratings
We expect the company's revenue for 24-26 to be 110.9/127.4/14.67 billion yuan, net profit to mother of 6.1/8.8 billion yuan, corresponding PE 32/22/16 times. The company was given 28 times PE in 25 years, corresponding to a target price of 5.66 yuan. For the first time, coverage was given a “buy” rating.
Risk warning
Risk of fluctuations in copper and gold prices; overseas expansion of Chinese miners falling short of expectations; progress in energy transformation falling short of expectations; offshore wind power tenders falling short of expectations; risk of exchange rate fluctuations.