Results for the first quarter of 2024 fell short of our expectations
The company announced its results for the first quarter of 2024: achieved revenue of 4.43 billion yuan, down 11.8% year on year, and realized net profit of 203 million yuan, up 1.12% year on year, in line with our and market expectations; after deducting non-net profit of 87.466 million yuan, down 38.8% year on year, lower than our expectations, mainly 1Q24 R&D expenses exceeded expectations.
Comment: 1) 1Q24 sales volume or decline dragged down revenue: The company's 1Q24 revenue fell 11.8% year on year to 4.43 billion yuan, which we think may be due to a year-on-year decline in sales volume (1Q23's relatively high base); the company previously announced 1Q24 production of 917,900 tons, +0.09% year-on-year, and the 1Q24 production and sales rate was low. 2) Gross margin has improved: affected by the year-on-year decline in steel prices, the company's 1Q24 gross margin increased by 1.3ppt to 10.59% year on year; 3) The cost rate increased by R&D expenses during the period: the 1Q24 company's cost ratio was 7.2%, up 2.5ppt year on year. Currently, the company's intelligent equipment amortization & R&D costs are still around 200 yuan (up about 100 yuan year on year, slightly down month over month). We believe that the company's R&D expenses will continue to be high in 2024-25, but it is unlikely that they will continue to increase significantly; We estimate that the company's net profit per ton is about 250 yuan/ton, a steady increase over the same period last year. 4) Phased decline in operating cash flow: The company's operating cash flow in the first quarter was 84.21 million yuan, which narrowed by about 80 million yuan year on year, or had an impact on the year-on-year increase in accounts receivable; the balance ratio was 60.5%, down 2.21ppt year on year.
Development trends
Investment in manufacturing remained strong in the first quarter, and the company's factory orders are expected to improve. From January to January 2024, the country's manufacturing investment increased 9.9% year on year (national fixed investment increased 4.5% year on year). Its growth rate and share of fixed investment have surpassed that of the real estate and infrastructure sector. Favorable policies for equipment renewal are expected to boost investment in the manufacturing industry. According to CICC Macro Group's forecast, the year-on-year growth rate of manufacturing and infrastructure fixed asset investment in 2024 was 7.8% and 10%. Most of the company's orders came from industrial projects, which are expected to fully benefit from the boom in manufacturing investment; in the medium to long term, the company's capacity utilization rate in 2023 has exceeded 90%, and some mature old bases can be expanded to 120% +. In addition, we consider that Honglu currently has sufficient land, and short-term company preferred orders and training costs. The medium- to long-term production expansion will follow the trend.
Intelligent transformation saves energy for the long term. According to our research, under current technology, welding robots are expected to replace 30% of the welding process. “Intelligent” means investment in R&D in the short term, but it is expected to deepen the cost advantage in the medium to long term. We are optimistic that the company will take the lead in occupying an intelligent highland and enjoy cost dividends.
Profit forecasting and valuation
We maintain the company's 2024-25 net profit of 1.29 billion yuan and 1.49 billion yuan, and the current price is 10x and 9x for 2024-25e P/E; we maintain the outperforming industry rating and target price of 20 yuan, and the target price corresponding to 2024-25e P/E is 11x and 9x, implying a 9% upward space.
risks
Demand falls short of expectations; steel prices fluctuate greatly; intelligent transformation falls short of expectations.