Incident: The company released its 2024 quarterly report. In Q1 of 2024, it achieved operating income of 644 million yuan, a year-on-year increase of 5.42%, realized net profit of 85 million yuan, a year-on-year decrease of 1.22%, and realized net profit without return to mother of 86 million yuan, an increase of 2.83% over the previous year.

The 2024Q1 performance was confirmed due to seasonal effects, and it is expected that it will resume a high growth rate in the future.

(1) Growth: In the first quarter of 2024, the company achieved revenue of 644 million yuan, a year-on-year increase of 5.42%, and a return of 85 million yuan, a year-on-year decrease of 1.22%. We determined that the reason for the low growth rate of 2024Q1 performance was seasonal, that is, downstream projects progressed slowly in the first quarter, affecting revenue recognition, and it is expected to gradually recover from Q2. Looking ahead to 2024, the domestic oil and gas industry's demand structure for explosion-proof appliances will change, capital expenditure in upstream exploration, mining and other fields will narrow, and downstream investment projects in refining, fine chemicals and other fields will increase, and demand for explosion-proof products is expected to continue to rise; safety systems for innovative products are driven by the November 2023 production safety policy, and orders from hazardous chemical parks are expected to land rapidly and contribute to revenue elasticity. According to the company's 2024 financial budget plan, the company's revenue is expected to reach 4,079 billion yuan in 2024, up 27.60% year on year, and return to mother is expected to reach 545 million yuan, up 18.16% year on year, maintaining a rapid growth trend.

(2) Profitability: In the first quarter of 2024, the company's gross margin and net margin were 53.22% and 13.13%, respectively, down 3.84pct and 1.11pct, respectively. We determined that the main reason for the decline in 2024Q1 gross margin was the confirmation of the new energy EPC business with low gross margin in the current period (the gross margin of this business was about 25%), but there was basically no confirmation in the same period last year, making it a relatively high share in the Q1 revenue structure.

Explosion-proof electrical appliances: ① Domestic trade: In the traditional petroleum industry, total capital expenditure in the refining and chemical sector has shrunk, and investment in stock project renovation, expansion and upgrading is large; at the same time, market demand in downstream fine chemicals and other fields is gradually increasing, and explosion-proof demand is expected to continue to rise; demand is strong in new fields such as food, medicine, and liquor. ② Foreign trade: Supply and demand in the international oil and gas industry have both increased. The company's rapid layout. The three major overseas operation centers in Europe, Central Asia and Southeast Asia have been established and put into operation, and the Saudi joint venture has entered the registration review stage. We believe that the company is ready to participate in global competition, and overseas markets will become the company's next major source of growth in the future.

Security system: It is an intelligent management and control system platform based on the Internet of Things, big data, 5G and other technologies. Since its launch in 2019, it has been upgraded three times, and the subsystems have been expanded from the original 8 to 10, and so far no peers can imitate it.

The November 2023 production safety policy brought about a high increase in demand for safety systems in the hazardous chemical park industry. The market size exceeds 10 billion dollars, and the company is expected to fully benefit. In addition, the company wholly acquired Sichuan Huanyu Zhongheng Technology Co., Ltd. in 2023. The company currently has a mature technical team of nearly 90 people matching security system technology, greatly enhancing the R&D, operation, maintenance and delivery capabilities of the company's intelligent safety systems business and further accelerating the company's strategic transformation.

Maintaining a “buy” rating: We expect net profit to be 545/628/739 million yuan in 2024-2026, corresponding PE 14/13/11 times, respectively. Maintain a “buy” rating.

Risk warning: There is a risk that the development of new fields falls short of expectations, that progress in overseas markets falls short of expectations, that the expansion of new businesses such as safety systems falls short of expectations, and that performance falls short of expectations based on certain assumptions.