Huarong Co., Ltd. released its report for the first quarter of 2024: the company's various businesses developed steadily, achieving operating income of 644 million yuan (+5.42% YoY); net profit to mother of 85 million yuan (-1.22% YoY); net profit after deduction of 86 million yuan (+2.83% YoY).

Key points of investment

Production safety requirements are getting stricter, and demand for explosion-proof electrical appliances has exploded

The development of the explosion-proof electrical appliance industry is closely related to the degree of industrialization. As emerging countries' demand for energy such as oil, natural gas, and coal mines continues to grow, emerging markets will become the main driving force for the future growth of the global explosion-proof electrical appliance market. The global explosion-proof electrical appliance market is expected to reach 8 billion US dollars (CAGR +8%) by 2025. The current domestic petroleum industry's demand structure for explosion-proof electrical appliances has changed, and with the increase of public safety awareness and government safety supervision, the explosion-proof industry has expanded from traditional oil, gas, chemicals to food, oil, medicine (liquor), military nuclear power, intelligent safety control, etc., and the application fields continue to expand. In particular, in the intelligent safety management and control industry, with the release of policies such as the “14th Five-Year Plan” for the safe production of hazardous chemicals, domestic chemical parks have begun construction of intelligent safety risk management and control platforms one after another, bringing new demand to the market.

The company's transformation and upgrading, and the digital internationalization strategy is leading a new chapter. The company's transformation from a traditional product manufacturer to a safe and intelligent integrated service provider has established a strategic line of “digitalization” and “internationalization”. 1) Explosion-proof electrical appliances: Demand in the domestic petroleum industry has changed structurally, total capital expenditure in the refining and chemical sector has shrunk, and investment in stock project renovation, expansion and upgrading has increased; supply and demand in the international oil and gas industry have both increased, and investment in oil and gas projects in the Middle East, Asia Pacific, Africa and other regions is intensive. 2) Angong Intelligence: After many iterations and continuous optimization, the company's security system has now integrated 10 major sub-systems, including smart lighting control and smart distribution control, to fully cover the various needs of users' on-site safety control. As of March 2024, the company has successfully completed the installation, commissioning and project acceptance of the security intelligent lighting control system and supporting explosion-proof equipment at the production site invested by global specialty chemical giant Yabo in Sichuan. Its technical strength and service capabilities have been unanimously recognized by Yabao owners and EPC contractors.

New Energy EPC was affected by seasonality, and Q1 performance briefly weighed on the 2024Q1 net profit of 85 million yuan (-1.22% YoY). Gross margin and net margin were 53.22% and 13.13%, respectively, down 3.84 pct and 1.11 pct respectively. The decline in the company's Q1 profitability was mainly due to: 1) there was a certain seasonality in manufacturing products, and construction progress slowed down due to low temperatures in the northern region; 2) The gross margin of the company's new energy EPC business increased in the year due to a higher than expected drop in PV module prices in 2023, but the company's expected price change in 2024 was not as large as in 2023, and 2024Q1 confirmed some new energy EPC businesses with low gross margins (not confirmed for the same period of 2023), which dragged down the company in the short term Overall profitability. We expect performance to gradually recover as the new energy EPC project accelerates after the weather improves, and safety and engineering intelligence projects in hazardous chemical parks are built and revenue confirmed in 2024.

Profit forecasting

The company's revenue for 2024-2026 is 45.86, 53.39, and 5.969 billion yuan, respectively, and EPS is 1.56, 1.93, and 2.25 yuan respectively. The current stock price corresponds to PE of 14, 11, and 10 times, respectively, giving it a “buy” investment rating.

Risk warning

The risk of declining capital expenditure in the domestic petroleum industry; the risk of increased competition in the professional lighting industry; the risk that international and domestic markets will become saturated after years of development in the photovoltaic industry.