Core views

2024Q1's revenue increased slightly, and equipment orders are expected to be converted steadily, driving overall revenue growth; profit declined significantly year-on-year, and is expected to be affected by adverse factors such as falling retail liquid prices and rising procurement costs for equipment raw materials. Retail liquid prices have shown seasonal recovery in March-April 2024, and the company is expected to break out of profit bottom in the second quarter. Currently, the company has plenty of gas orders, and the scale of pipeline gas production is expected to continue to grow, consolidating the foundation for growth in the next 2-3 years; the bottom of retail liquid prices is yet to rise, providing potential profit elasticity.

occurrences

The company released its 2024 quarterly report, achieving revenue of 3.305 billion yuan, +0.51% year over year; net profit to mother of 204 million yuan, -26.15% year over year; net profit after deducting non-return to mother of 196 million yuan, -26.71% year over year.

Brief review

2024Q1 revenue grew slightly, and profit side was under phased pressure

2024Q1's revenue increased slightly, and equipment orders are expected to be converted steadily, driving overall revenue growth; profit declined significantly year-on-year, and is expected to be affected by adverse factors such as falling retail liquid prices and rising procurement costs for equipment raw materials. According to statistics based on industrial gas price data from Zhuochuang Information, the average price of 2024Q1 liquid oxygen was 375.23 yuan/ton, -14.5% year on year; the average price of liquid nitrogen was 425.50 yuan/ton, -11.77% year on year; and the average price of liquid argon was 1204.05 yuan/ton, +43.16% year on year. Since oxygen and nitrogen account for a relatively high proportion of bulk gases, the comprehensive price of liquids is under pressure. From March to April 2024, retail liquid prices have shown seasonal recovery. Both liquid oxygen and liquid nitrogen prices are close to the same period last year, and liquid argon continues to be high. Looking ahead to the second quarter, we will enter the peak gas demand season after April, and the company's profit level is expected to improve year on year and month on month.

Profit level: The 2024Q1 net interest rate has been low for nearly 5 years. It is expected to significantly correct the 2024Q1 company's comprehensive gross margin decline of 4.73 pct to 19.90% year-on-year. It is expected that in addition to the impact of gas prices, price fluctuations in aluminum and stainless steel, raw materials for equipment will also have a certain impact on the gross margin of equipment.

The company's expense ratio decreased by 1.55 pct to 10.81% year on year; among them, management expenses decreased by 1.16 pct to 5.86% year on year, which is expected to be mainly due to factors such as a gradual decline in equity incentive cost amortization, leading to further optimization of management expenses; sales expenses ratio +0.08 pct to 1.35% year on year, R&D expenses rate -0.08 pct to 3.10% year on year, and financial expenses ratio -0.39 pct to 0.50% year on year. In 2024q1, the company's net interest rate fell 2.23pct year on year to 6.72%, the lowest level in the same period in nearly 5 years. With the recovery of gas prices and the continuous optimization of the cost side, the company's profit level is expected to recover significantly in the second quarter and even throughout the year.

Equipment: The number of orders received has been strong for 4 consecutive years, and overseas demand is expected to remain high. The amount of new equipment sales contracts signed in 2023 (including petrochemical equipment) reached 6.470 billion yuan. The number of orders received was full, and remained high for 4 consecutive years. Among them, the annual foreign trade contract amount reached 908 million yuan, accounting for 14.03%; the share of overseas sales contracts for cryogenic petrochemical equipment increased to 53%. Looking ahead to 2024, overseas demand is expected to remain strong, and the company's expansion of overseas markets will support the equipment business. Moreover, with the steady transformation of equipment orders, there is still room for improvement in equipment revenue.

Industrial gases: Hangzhou Oxygen's ability to accept orders is obvious, laying the foundation for long-term growth. According to the company's 2023 annual report, the company signed a new gas project to produce 450,000 Nm of oxygen in 2023? /h. Year-end gas investment (on-hand orders+already in operation), cumulative oxygen production volume of 3.2 million Nm? /h, take it to a new level. In January 2024, the company successively won a total of 160,000 Nm from Shanxi Jingang? /h gas supply project, Tianyue fertilizer 16,000 Nm? The /h gas supply project, totaling 176,000 square meters, accounted for about 39% of new gas orders received in 2023, achieving a “good start”. As downstream capital expenditure gradually passed its peak, the company's strong ability to take orders became an alpha source. 1) Gas prices: Pipeline gas prices are stable. Retail liquid prices have not yet met the conditions for a sharp rise after seasonal recovery, but they are expected to gradually break out of the bottom and usher in a moderate recovery. 2) Gas production scale: The company currently has plenty of gas orders, and the scale of pipeline gas production is expected to continue to grow, consolidating the foundation for growth in the next 2-3 years; the bottom of retail liquid prices is yet to rise, providing potential profit flexibility.

Investment advice: We expect the company to achieve revenue of 150.78, 175.43 and 20.561 billion yuan respectively in 2024-2026, and net profit to mother of 13.54 billion yuan, 16.61 billion yuan, and 20.41%, respectively, +11.30%, +22.72%, and +20.41% year-on-year, corresponding to the 2024-2026 PE valuation of 21.94, 17.88, and 14.85 times, respectively, to maintain a “buy” rating.

Risk analysis:

1) Risk of declining retail gas prices: The current economic situation at home and abroad is complicated, and there is uncertainty about the company's retail gas demand. If the decline exceeds expectations and the company's production capacity is further released, it may cause retail gas prices to continue to decline.

2) Risk of increased competition in the gas industry: The market space for outsourced gas, including bulk gas and retail gas, is large, attracting an influx of new entrants, which may cause the company to be unable to fully utilize the advantages of self-made air separation equipment in certain regional markets, which in turn will lead to a decline in market share.

3) Management risk: As the number of the company's gas subsidiaries and the scale of installations already in production continue to increase, higher and higher requirements are placed on the company's management level, and the risk of the governance structure increases.

4) Risk of weak growth in the equipment business: As a traditional business, although the company's competitive advantage is obvious, there is a risk of a decline due to the overall boom in the downstream heavy chemical industry.