Key points of investment
Incident: The company released the 2023 annual report and the first quarter report of 2024. For the full year of 2023, it achieved total operating income of 21.51 billion yuan, realized net profit of 885 million yuan to mother, realized deducted non-net profit of 641 million yuan, and achieved net cash flow from operating activities of 1,215 billion yuan. In the first quarter of 2024, it achieved total operating income of 4.711 billion yuan, -2.94% year on year; realized net profit to mother of 203 million yuan, +7.27% year over year; realized deducted non-net profit of 190 million yuan, +6.78% year on year.
The primary power transmission and distribution equipment leader, UHV won the bid for promotion. As a state-owned state-owned state-owned enterprise that has been deeply involved in the energy and power equipment industry for many years, the transmission and distribution industry chain is fully equipped. The leading products include high-voltage switches, transformers, reactors, power capacitors, transformers, insulators, bushings, zinc oxide lightning arresters, DC transmission converter valves, etc. In 2023, by product, switches/transformers/capacitors & lightning arresters/achieved revenue of 76.63/78.23/803 million yuan respectively, +21.53%/+40.31%/+20.67% year-on-year, and gross margins of 25.23%/8.47%/21.71%, respectively, +2.19/ -0.89/+0.05pct, respectively. The increase in gross margin was mainly due to the increase in revenue share of high-margin products in the current period, leading to a year-on-year increase in the gross margin of switch products. 24Q1 revenue declined slightly, mainly due to changes in the scope of consolidation compared to the same period last year. The same period last year included Western Power New Energy and Western Power's comprehensive energy revenue. The company won the bid of about 7.928 billion yuan for State Grid UHV equipment in 2023, accounting for about 19.56%; power transmission and transformation equipment won the bid of about 5.394 billion yuan, +71.35% over the same period last year, accounting for about 7.56% of the share. In 2024, the first batch of power transmission and transformation equipment won the bid of about 1,133 billion yuan, maintaining the leading market share in the industry. Judging from the power grid planning, during the “14th Five-Year Plan” period, China planned to build a total of 38 UHV lines of the UHV project “24 interchange and 14 direct”, with a line mileage of more than 30,000 kilometers. With the continued implementation of large bases and the rapid growth in electricity consumption, UHV construction demand and pace of promotion have fully accelerated. It is expected that “four straight and two interchanges” will be approved and started in 2024, and UHV will maintain its high momentum. The State Grid said it will increase its investment in power grids this year and speed up the construction of UHV and UHV backbone grids. It is estimated that the total investment scale for power grid construction in 2024 will exceed 500 billion yuan. In January-March '24, China completed an investment of 76.6 billion yuan in power grid projects, an increase of 14.7% over the previous year. As a domestic primary equipment leader, the company is expected to fully benefit.
The off-net market continues to grow, and reports of international market wars are spreading frequently. In 2023, the number of new contracts signed by the company in product categories such as “Five Big Six Small” increased year-on-year. It successfully won the bid for the first commercially tendered complete generator circuit breaker project, breaking the monopoly on imported equipment; winning the bid for the first 1,000 kV million-unit nuclear power transformer in China, achieving a new breakthrough in the field of nuclear power. At the same time, the total number of new contracts signed for equipment exports doubled, winning bids for Bangladesh's 400 kV substation and Saudi State Grid projects, making it the largest overseas order for combined electrical equipment in recent years. The general engineering contract business achieved another breakthrough and successfully entered the African new energy market. Open cooperation has been very fruitful. Long-term strategic relationships have been established with the Three Gorges Group, South-to-North Water Transfer, etc., and technical cooperation agreements have been signed with China Southern Power Grid and China Power Construction. Jointly build the “Belt and Road” from a high level and a high starting point, signed a memorandum of cooperation with the Egyptian Electric Power Holding Company to upgrade the distribution network, and signed a framework agreement with the National Distribution Grid Corporation of Uzbekistan for the construction of 100 substations. Driven by multiple factors such as global energy transformation, power grid upgrading, and manufacturing expansion, global power grid investment has ushered in a new cycle, and the boom in the power equipment overseas chain continues (high-voltage switches and transformers continued to maintain a high growth rate of 30% and 26% in January-March). As a leading domestic power transmission and distribution equipment leader, the company is expected to fully enjoy overseas dividends.
Increase investment in R&D, improve quality and efficiency, and deepen reforms. In 2023, the company spent 718 million yuan on R&D, +19.70% year-on-year, and R&D investment continued to increase. Successfully developed “stuck neck” core equipment and high-end equipment such as 190 kiloampere interruption, 550 kV/8000 A/80 kiloA GIS, the world's first hybrid conversion converter, and high-capacity green hydrogen high voltage converter transformer to fill many gaps in the industry; 7 types of products, including 100 megawatt high-voltage cascade direct-mounted energy storage systems, were selected for the third batch of first (set) lists in the energy field; 18 scientific and technological achievements such as “10 megawatt maglev flywheel energy storage key technology” have passed national industry certification; “10 MW maglev flywheel energy storage key technology” Key research and development plans were approved and established, The “UHVDC Bushing” project was successfully applied for a special project by the Ministry of Industry and Information Technology. At the same time, we are actively promoting the construction of smart parks, supplying power supplies for hydrogen production, and receiving national key research and development plans for long-term energy storage. The above fields have seen significant market growth. In order to further optimize the company's business layout, the company completed the disposal of shares in Xidian New Energy and Xidian Comprehensive Energy in 2023, and merged into Hengchi Electric. The company is focusing on deepening reform efforts and enhancing development vitality. The new round of state-owned enterprise reform actions has been fully implemented, management efficiency continues to improve, the “two funds” turnover ratio has increased year on year, and net cash flow from operating activities has improved year on year. We believe that with the deepening reform of central enterprises and the gradual improvement of the assessment system, we are optimistic that the company's development vitality will be further strengthened.
Investment advice: The company is a leading domestic enterprise that can provide complete primary transmission and distribution equipment for AC/DC transmission and distribution projects. It is a listed company with a rich history, strong complete capabilities, complete R&D and manufacturing system, and the highest degree of internationalization. It is expected to continue to benefit from the construction of China's UHV lines and the continuous development of overseas markets. We predict that the company's net profit for 2024-26 will be 1,163, 1,464, and 1.904 billion yuan, respectively, corresponding EPS of 0.23, 0.29, and 0.37 yuan, and PE of 31, 25, and 19 times. This is the first coverage, giving it an “increase” rating.
Risk warning: 1. Grid investment is lower than expected. 2. New product development falls short of expectations. 3. Increased competition in the industry.