Order volume & production increased steadily, maintaining a “buy” rating
In the short term, thanks to increased demand for heavy steel and high overseas demand, orders and net profit per ton are expected to improve. In the medium to long term, the company's intelligent transformation is expected to open up the production capacity ceiling, or drive production and revenue to the next level. 24Q1 order volume is -3% year over year, and output is +0.1% year over year. At the moment, it is recommended to focus on the investment value of leading steel structure manufacturing companies. At the same time, the company increased its dividend ratio from 15% to 30%, corresponding to the closing price of April 12. We expect the company's net profit to be 13.1, 15.1, and 1.74 billion yuan in 24-26 years, giving 13 times PE over 24, and a corresponding target price of 24.70 yuan, maintaining a “buy” rating.
Highlight 1: Overcoming the “stuck neck” process of intelligent welding, focusing on independent software and hardware R&D companies to start the path of system development and hardware self-integration. On the hardware side, Honglu already has the ability to integrate ground-rail smart welding workstations without teaching, and issued a tender notice for 2000 sets of ground rails, welding guns and cleaning guns in April '24, and plans to integrate welding robots in large quantities. In terms of software systems, the company successfully developed a “lightweight arc welding robot intelligent welding system” in '23, or laid the foundation for the subsequent development and upgrading of welding systems for industrial welding robots. From the perspective of cost reduction, according to the 90% capacity utilization rate and the neutral assumption of 50% workload replacement ratio, a single production line with robots working one shift, two shifts, and three shifts can save 11-12 welders, and the cost reduction per ton is 65, 103, and 110 yuan, respectively. If the capacity utilization rate increases to 100%, 120%, 150%, and when the robot is in two shifts, the corresponding cost reduction per ton is 101, 126, and 146 yuan. The cost reduction and efficiency brought about by intelligent transformation is expected to gradually be reflected.
Highlight 2: Binding core owners and actively opening up growth space in overseas markets, central state-owned enterprises are speeding up the pace of going overseas. In '23, new overseas orders increased 17.1% year-on-year, faster than the total number of new orders signed during the same period of 9.15 pcts. New overseas orders accounted for 10% of the total number of new orders signed.
In the past 23 years, the five major customers had already accounted for 22.85% of revenue. Central state-owned enterprise customers brought good continuity to orders. At the same time, Honglu may be expected to follow the central state-owned enterprise customers to accelerate the expansion of overseas markets. From a profitability perspective, considering additional profits from transportation, packaging, and painting, the profit per ton is expected to increase.
Highlight 3: Procyclical recovery, increasing the share of heavy steel plants driving net profit improvement. In recent years, with the “industrial upgrading” policy initiative, the demand for multi-storey plants has gradually increased. We believe that the increase in the share of heavy steel structures may be the general trend. From the perspective of profit and processing costs, the average price of a single ton of light steel in Q1 in '23 - the average price of steel in the quarter was 1,409 yuan/ton, and the average difference between the price of a single ton corresponding to heavy steel orders and the cost of a single ton of steel plate in the current season was 2,707 yuan/ton. We are optimistic that the company's net profit per ton will improve as demand for heavy steel increases.
Risk warning: Production and sales fall short of expectations; intelligent transformation falls short of expectations; new supply exceeds expectations; estimates are somewhat subjective.