1Q24 results are basically in line with our expectations

The company announced 1Q24 results: 1Q24 achieved operating income of 4.682 billion yuan. After considering Hengchi Electric's inclusion in the scope of the merger, it was -2.35% year-on-year; net profit to mother was 203 million yuan, +7.3% year-on-year; net profit after deducting non-return to mother was 190 million yuan, +6.8% year-on-year. The 1Q24 results were largely in line with our expectations.

The impact of the subsidiary's presentation was limited, and the equity of the West High Court was diluted, leading to an increase in minority shareholders' rights. The company completed the registration of commercial and commercial changes in Xidian New Energy and Xidian Comprehensive Energy in April 2023. Both are no longer incorporated into financial reports, so 1Q24 revenue declined slightly from the same period high. However, the profitability of Xidian New Energy and Xidian General Energy is relatively weak, and their impact on the company's net profit is limited. The company's 1Q24 operating profit/total profit was +20.8%/+19.8%, minority shareholders' equity +119.2%, and net profit to mother was +7.3%. We think it was mainly due to the spin-off and listing of the company's holding subsidiary Xigaoyuan in June '23, and the company's holding ratio was diluted from 59% to 44%. We expect the above base effect to be gradually eliminated from 2Q onwards.

Gross margin continues to rise, marketing increases guarantee order acquisition, and increases repayment efforts to improve cash flow.

1Q24 gross margin/net profit margins were 17.9%/4.3%, respectively, +4.6pp/+0.3ppt, year-on-year, respectively. The company's sales/management/R&D/finance rates were 3.5%/6.2%/3.2%/-0.3%, respectively, compared with +0.6ppt/+0.6pp/ -0.4ppt. The company increased its marketing investment and expanded overseas channels. The company's 1Q24 operating cash flow changed from negative to positive year-on-year, to 225 million yuan.

Development trends

Domestic market share is leading, and overseas orders continue to gain strength. The company won 938 million yuan in the State Grid's first tender for substation equipment. Among them, the market share of transformers/combined appliances increased by 0.5/1.7ppt to 12.1%/17.2%, respectively, compared to the full year of last year. On the overseas side, the company won the bid for the 400kV substation in Bangladesh and the Saudi State Grid project, making the largest overseas order for combined electrical equipment in recent years. The company has plenty of domestic and foreign orders, and we think it is expected to maintain steady growth.

UHV construction is speeding up, and high-margin products are expected to contribute to flexible performance. Since the beginning of the year, “one transmission, one straight” UHV project has been approved. We expect to approve “four straight and two transfers” throughout the year. Recently, the State Grid has tendered reserve projects such as Jiangdian Electric Transmission's UHV DC from Sichuan and Chongqing and Zhejiang Ring Network UHV AC, and CLP Equipment has tendered equipment for the south-central, central, and western Saudi Arabian Rouzhu projects. We believe that the pace of early and approved domestic UHV construction is expected to be further accelerated this year and next. Combining UHV and flexible DC to go overseas, we are optimistic about the volume of tenders for related equipment. The company has a stable position in the UHV market. We believe it is expected that it will continue to receive high-margin orders. Ongoing orders may confirm revenue one after another starting in the second half of this year, bringing great performance flexibility to the company.

Profit forecasting and valuation

The profit forecast for 2024 and 2025 remains unchanged. The current stock price corresponds to the 2024/2025 price-earnings ratio of 29.6x/20.8x. Maintaining an industry rating and a target price of 8.48 yuan, corresponding to 34.0 times the 2024 price-earnings ratio and 23.9 times the 2025 price-earnings ratio, there is 14.9% upside compared to the current stock price.

risks

Raw material prices fluctuate, grid investment falls short of expectations, geopolitical and trade policy changes.