1Q24 results were higher than our expectations
The company announced 1Q24 results: revenue of 9.67 billion yuan, +4.93% year-on-year; net profit to mother of 1,042 billion yuan, +33.08% year-on-year. The performance exceeded our expectations due to the optimization of the coal machine order structure and increased profitability.
The revenue structure of coal mills has been optimized to increase profitability. In the reporting period, 1) Coal machine sector: Revenue of 4.83 billion yuan, +0.72% over the same period, contributed 1,085 billion yuan in net profit, or +32.31% over the same period. The reason for the faster profit growth rate was the high gross margin of coal machine products that confirmed revenue during the reporting period. 2) Auto zero sector: Revenue of 4.84 billion yuan, +9.48% year over year, contributing 87.81 million yuan of net profit, +91.7% year over year. Among them, ASIMCO achieved net profit of 167 million yuan, +34.38% year-on-year, and SEG net profit of 28.83 million yuan, a decrease of 18.46 million yuan compared to the same period last year. On the basis of the optimization of the revenue structure, the company's profitability has increased dramatically.
1Q24's gross margin/net margin was 23.9%/10.8%, respectively, +2.9 ppt and +2.3 ppt.
Development trends
The intelligent transformation of coal mines drives continued high growth in capital development, and the auto zero business reduced losses and increased profitability.
In February 2020, eight ministries and commissions jointly issued the “Guiding Opinions on Accelerating the Intelligent Development of Coal Mines”, which requires coal enterprises to vigorously promote the intelligent upgrading and transformation of coal mines1. By 2025, large-scale coal mines will basically be intelligent, and an intelligent standard system for coal mines will initially be established. By the end of 2023, the number of intelligent mining jobs in China had increased to 1,651. We believe that the intelligent transformation of coal mines has shortened the renewal cycle of coal machine equipment, which in turn has boosted the market size of the annual stock of coal machine equipment updates. As a leader in coal machine equipment, Zheng Coal Machinery has a strong competitive advantage in the field of hydraulic bracket intelligent control systems, which has led to a rapid increase in the company's coal machine orders, and the scale effect continues to increase the company's profitability. At the same time, the company announced that it will terminate the listing plan of the spin-off subsidiary Hengda Intelligent Control.
Profit forecasting and valuation
We raised net profit of 2024 and 2025 by 7.0% and 10.7% to 3.894 billion yuan and 4.424 billion yuan as the company's revenue structure optimization led to an increase in profitability exceeding expectations.
The current A share price corresponds to a price-earnings ratio of 7.5 times/6.6 times in 2024/2025, and the current price of H shares corresponds to a price-earnings ratio of 4.8 times/4.1 times in 2024/2025. Due to the company's increased profitability, and there is room to continue to exceed expectations, we raised our target price for A shares by 21.1% to 20.41 yuan, which corresponds to 9.4 times the price-earnings ratio of 2024 and 8.2 times the price-earnings ratio of 2025, which has 25% room to rise compared to the current stock price. The target price for H shares was raised by 34% to 13.0 yuan at the same time, with 10% upside compared to the current stock price, corresponding 5.3 times the 2024 price-earnings ratio and 4.5 times the 2025 price-earnings ratio. They all maintained the “outperforming the industry” rating unchanged.
risks
The growth rate of coal machine orders fell short of expectations; the improvement in profitability of the auto zero business fell short of expectations.