Key points of investment
Incidents:
Quarterly reports of listed companies: Achieved revenue of 3.3 billion yuan, up 0.5% year on year; net profit to mother of 200 million yuan, down 26% year on year; net profit without return to mother was 200 million yuan, down 27% year on year.
The results for the first quarter of 2024 were slightly lower than expected. Due to multiple factors, gross margin decreased year-on-year in the first quarter of 2024. The company's revenue was basically the same as the same period last year, in line with expectations. The gross margin was 19.9% (24.6% in the same period last year). The manufacturing business was mainly affected by rising raw material prices, while the gas business was mainly affected by falling rare gas prices and low liquid retail gas prices. On the cost side, in the first quarter of 2024, the company's sales expense ratio was 1.35% (1.27% in the same period last year), the management expense ratio was 5.86% (7.02% in the same period last year), the R&D expense ratio was 3.10% (3.18% in the same period last year), and the financial expenses ratio was 0.50% (0.89% in the same period last year). The large decline in management expenses was mainly due to a decrease in equity incentive payments compared to the same period last year.
Continuing to expand the gas business and refine the equipment business, the number of new orders signed in 2023 remained high. In 2023, the company's gas sales were 8.2 billion yuan, up 2% year on year; air separation equipment sales were 4.2 billion yuan, up 6% year on year. Gas and air separation equipment sales revenue accounted for 62% and 32% respectively, and gross margins were 19% and 32% respectively. The company continues to expand its gas business. The total number of new gas investment projects signed in 2023 was 450,000 square meters, and the cumulative gas investment volume for oxygen production reached 3.2 million square meters by the end of the year. The company continues to refine the equipment business. In 2023, it signed a new equipment sales contract of 6.5 billion yuan, of which 900 million yuan was a foreign trade contract, accounting for 14%.
The top priority in 2024 is “reform and innovation, strengthening the foundation”, and accelerating the development of the gas industry and the layout of emerging industries. In 2024, the company will focus on the goal of “creating a world-class enterprise in the gas industry”, take “reform and innovation, and strengthen the foundation” as its top priority to further consolidate and enhance its technical advantages, market advantages, brand advantages, and advantages of the entire industry chain, and accelerate the development and growth of the gas industry and the layout of emerging industries.
Fully implement digital transformation, deepen lean management, consolidate the support system, balance the speed and quality of development, prevent and mitigate various risks in the expansion process, and promote the implementation of a series of “strong chain extension” measures.
The controlling shareholder, Hangzhou Capital, plans to acquire Yingde Gas and promises to promote the restructuring with the listed company Gas Power Technology (the main asset is Yingde Gas) after the transaction is completed. It is the largest independent industrial gas supplier in China.
In 2020, Gas Power Technology (including Baosteel Gas) had revenue of 19.4 billion yuan, the market share of the independent third-party gas supply market was 22.3%, and net profit was 2.3 billion yuan. 80% of the company's revenue comes from air separation gas, and the vast majority comes from on-site gas supply. The company has strong profitability, with a 2020 ROE of 20%, gross profit margin of 28%, and net interest rate of 13.2%.
According to the announcement, after the transaction was completed, Hangzhou Capital held 30% of the buyer's SPV shares and was the largest shareholder (non-controlling shareholder) of the buyer's SPV. After the seller has completed the internal restructuring, the target company will mainly be engaged in the manufacture and sale of on-site gas production, retail gas, special gas, and clean energy products, and is in the same business as Hangzhou Oxygen Co., Ltd.'s main business.
Hangzhou Capital promises: Hangzhou Capital will push the listed company to sign an asset restructuring agreement with the buyer SPV within 36 months after the transaction is completed, and the listed company will disclose the transaction plan.
If the listed company and the buyer's SPV carry out asset restructuring, the listed company will achieve restructuring and integration of high-quality assets in the same industry, which will help the listed company to exert synergies, expand production scale, improve asset quality, optimize financial conditions, and enhance market competitiveness.
Hangzhou Oxygen Co., Ltd.: Towards a leader in industrial gas in China! Substitute domestic production to create an advantage in the entire industry chain. The company's pipeline gas business has accelerated in recent years, with a stock operation market share of 10%, and a newly signed gas operation market share of 40-50%. It is estimated that by the end of 2025, the company's gas operating scale will exceed 3 million square meters, the compound growth rate of gas business revenue from 2022-2025 will reach 23%, and the company's gas business revenue will account for more than 75% in 2025.
The 2022 equity incentive plan was granted. Net profit is expected to grow steadily in 2023-2024. Equity incentives will be lifted over a three-year period, 24, 36, and 48 months, respectively, from the date the registration of the restricted shares granted accordingly. The unlocking ratios are 40%, 30%, and 30%, respectively. Equity incentive performance (net profit after deduction of non-return to mother) unlock conditions: Based on the average net profit deducted from non-return to mother in 2018-2020 (i.e., 688 million yuan), the growth rate for 2022 to 2024 was not less than 60%, 66%, and 73%, or 1,101, 11.43, and 1,191 billion yuan. Furthermore, the return on net assets for 2022 to 2024 was not less than 14%, 14.5%, and 14.5%, respectively.
Growth path: Demand growth+increase in market share+increase in profitability. Long-term profit margin has exceeded several times (1) Industry demand continues to grow: 1) The total demand in the industrial gas market is nearly 200 billion yuan. Among them, the third-party outsourcing market is growing rapidly. The outsourcing ratio is expected to increase from 41% in 2021 to 45% in 2025. 2) In 2021, the size of China's industrial gas market increased by 10% year-on-year, and China's per capita gas consumption accounted for 30-40% of the per capita gas consumption in developed countries such as Western Europe and the United States. China's industrial gas market is expected to grow at a compound rate of 6-8% by 2025. (Source of the above data: Please refer to the company's in-depth report “Hangzhou Oxygen Stock In-depth PPT: Domestic Substitution, Product Upgrade, Towards Industrial Gas Leader”, July 8, 2022) (2) The company's market share increased: Under the domestic substitution trend, the company's stock share in the third-party gas supply market in 2021 was 9%, and the incremental share was 45%. It is expected that the company's share of the third-party market will double in 2025; it is expected that the company's share of the third-party stock market will double in 2025; it is expected that the long-term company's share of the third-party stock market will be 3-4 times that of 2021 (30-40% market share).
(3) The company's product structure has been upgraded, and profitability continues to increase: 1) The gas business's share of revenue continues to increase, while the growth and profitability of the gas business is higher than that of the equipment business. 2) The share of revenue from the retail business in the gas business continues to rise, and the profitability of retail gas is higher than that of pipeline gas. 3) The share of revenue from the electronic specialty gas business in the retail gas business will continue to increase, and the profitability of the electronic specialty gas business is far higher than that of the general industrial gas retail business.
Profit forecasts and investment advice
The company is a leading domestic air separation equipment and industrial gas enterprise. Technology research and development advantages, advantages in the entire equipment-EPC-gas operation industry chain, brand advantage, system and management advantages form the core competitiveness of the company. We expect the company's net profit to be 1.42, 17.01, and 2.03 billion yuan respectively in 2024-2026, with year-on-year growth rates of 17%, 20%, and 18%, respectively, and a three-year compound growth rate of 19%, corresponding to PE 21, 17, and 15 times, respectively. Maintain a “buy” rating.
Risk warning
Controlling shareholder transaction uncertainty risk, industry competition risk and market risk, gas price fluctuation risk.