Key points of investment:
Incident: On April 24, 2024, the company released its annual report for the year 23 and the quarterly report for the year 24. In '23, the company achieved operating income of 1,946 billion yuan, an increase of 7.4% year on year; net profit to mother was 412 million yuan, up 16.8% year on year; net profit after deducting non-return to mother was 393 million yuan, an increase of 9.2% year on year. 24Q1 achieved operating income of 255 million yuan, a year-on-year decrease of 41.6%, net profit to mother of 29 million yuan, a year-on-year decrease of 70.8%, and net profit after deducting non-return to mother of $0.23 million, a year-on-year decrease of 76.0%.
Short-term performance is under pressure, and depreciation and expenses due to the commissioning of Dongying production capacity are greatly affected. The 150,000 tons of large megawatt castings invested and built by the company in Dongying were put into operation in the second half of '23. Depreciation costs and additional labor costs caused by the successive conversion of fixed assets affected short-term profit performance. The gross margin for 23Q4/24Q1 was 27.7%/23.9%, respectively, and the cost ratio for the period was 9.3/ 14.1%, respectively. The gross margin decreased, and the expense ratio also increased significantly. Looking ahead, as production capacity climbs and releases one after another, depreciation and expenses are expected to be diluted, and profitability is expected to recover significantly.
The foundry business developed rapidly, and a second growth curve gradually took shape. The company's foundry products business revenue increased 20.02% year on year in '23. Jinlei Heavy Equipment, a casting subsidiary, has successfully won the bid for the four major components of Shangdian V7, Xige SG14, Dongdian's 18MW shaft system and 20MW main frame, and Dongdian's 18MW shaft and 20MW orders have completed the delivery of some products. This is the first time in the industry that large megawatt wind power castings have been developed. The company has established good strategic partnerships with high-end global wind power manufacturers such as GE, Siemens Gamesa, Yunda Co., Ltd., Endean Xinneng, Vestas, Dongfang Electric, Goldwind Technology, and CRRC.
It is planned to invest 2,651 billion yuan to expand the production capacity of large-scale high-end forgings by 280,000 tons. The company plans to invest in the construction of a high-end transmission equipment science and technology innovation industrial park project in Gangcheng District, Jinan City. The total investment plan is 2,651 billion yuan. The construction period is 4.5 years. After completion, it will form a full-process production capacity of 280,000 tons of large-scale high-end forgings per year. The company has been deeply involved in the forging industry for more than ten years and is already TOP1 in the field of wind power forging spindles. This expansion of production is expected to further strengthen the company's core competitiveness in the forging field and open up new performance growth points.
Profit forecast and investment advice: Considering the impact of Dongying's production capacity climbing period and delays in the release of seabreeze demand, we expect the company's revenue for 24-26 to be 24.7/29.4/3.59 billion (previous value: 29.1/39.0/increase), net profit to mother of 5.2/6.5/810 million (previous value 6.0/8.9/new), and corresponding EPS of 1.61/2.00/2.49 shares, respectively, up 27%/24%/25% year-on-year, respectively. Considering the rapid development of the company's foundry business, the second growth curve is expected to enter the volume phase. Therefore, the company will be given 15 times PE in 2024, corresponding to a target price of 24.15 yuan/share, maintaining a “buy” rating.
Risk warning: customer certification falls short of expectations; wind power installations fall short of expectations; increased industry competition; risk of rising raw material prices, etc.