Incident: The company released its annual report for the year 23 and the quarterly report for '24. The operating situation continued to improve. Net profit after 24 Q1 turned a loss into profit after 23 years, and net profit without return to mother increased, and gross margin increased. In '23, the company achieved revenue of 573 million yuan, YOY -69.89%; net profit to mother - 318.257 million yuan, YOY -111.10%; net profit after deduction - 330.713 million yuan, YOY +39.87%. The main reasons for the company's loss in performance include: (1) the sale of part of Dongguan Sixiang's shares in December '22 (continued to hold 17.81% of the shares); (2) termination of the restricted stock incentive plan, with an equity incentive fee of $7.6874 million; (3) the water-cooled product business was affected by external factors such as investment arrangements and project progress for power system-related transmission and distribution projects, and the revenue share of high-margin products was relatively low; (4) the government subsidy was 6.96 million yuan, which was a significant decrease compared to 30.26 million yuan in '22. Excluding factors related to Dongguan Silixiang and the transfer of its shares, revenue and net profit without return to mother achieved year-on-year growth, mainly due to increased gross margin and reduced period expenses. The company's gross margin in '23 was 24.90%, +5.18pct year over year, excluding the impact of business divestment, +3.33pct year on year; YOY for sales/management/finance/R&D expenses was -28%/-39%/-101%/-68%, respectively.

Traditional businesses are gradually improving, and emerging business data center+energy storage revenue is contributing significantly. In '23, the company's high-power power electronic thermal management products (formerly DC water cooling+new energy power generation water cooling+flexible AC water cooling+electric transmission water cooling) had revenue of 263 million yuan, YOY -8.36%, a significant improvement over last year's -59%, a gross profit margin of 22.36%, +2.80pct; high-power density device thermal management products (data center+energy storage) had revenue of 188 million yuan, YOY +36.10%. The revenue share increased from 25% last year to 33% (excluding the impact of the divested business), and the gross profit margin was 16.85% + 4.71 pct; engineering operation and maintenance service revenue of 113 million yuan, YOY +16.78%, gross profit margin 41.51%, year-on-year -0.23pct.

24Q1 turned losses into profits, and cost control was effective. 24Q1 achieved revenue of 179 million yuan, YOY +18.53%; net profit to mother of 5.62 million yuan, YOY +197.29% (negative for the same period last year), turning loss into profit; gross profit ratio 24.38%, +1.65pct year on year; sales/management/financial/R&D expense ratios were 4.56%/11.84%/0.26%/4.26%, respectively, -0.28pct/-3.02pct/-0.08pct/-0.95pct, and the cost ratio was gradually reduced, especially management fees. The rate has been greatly improved.

Data center+energy storage+UHV troika drives growth

Data center liquid cooling sector: AI-driven growth. The sales volume of ICT thermal management products of Gaolan Innovation, a wholly-owned subsidiary, increased significantly in 23 years, achieving operating income of 178 million yuan, YOY +66.29%; net profit of 6.1818 million yuan, and YOY +256.00%. The company's key products include server liquid cooling plates, fluid connection components, CDU of various models and different heat transfer forms, TANK and heat exchange units. It can provide thermal management solutions for cold plate and immersion liquid cooled servers. It has the ability to provide one-stop comprehensive solutions from heat dissipation architecture design and equipment integration to system debugging and operation and maintenance, and can reduce PUE to less than 1.1. Currently, related products have batch supply capabilities. The company continues to develop and reserve related technologies and actively expand customers. As AI high-density computing accelerates the deployment of liquid cooling demand, it is expected to fully enjoy the dividends of the industry.

The field of energy storage liquid cooling: Benefiting from the increase in the installed scale of energy storage. According to the National Energy Administration, the cumulative installed capacity of new domestic energy storage increased by more than 260% compared to the end of 2022, nearly 10 times the installed capacity at the end of the 13th Five-Year Plan. Jibang Consulting expects China's new energy storage installed capacity to reach 29.2 GW/66.3GWh in 24, an increase of about 46%/50% over the previous year. The Zhongguancun Energy Storage Industry Technology Alliance predicts 24-25 as the last two years of the “14th Five-Year Plan”, and the installed scale of new energy storage is still growing rapidly. The company continues to invest in research and development in energy storage battery thermal management technology. It has technical reserves and solutions based on lithium battery single cabinet energy storage liquid cooling products, liquid cooling systems for large-scale energy storage power plants, and prefabricated cabin energy storage liquid cooling products. Currently, related products have batch supply capacity, which is expected to benefit from the rapid growth of domestic energy storage installed capacity based on its own product and customer accumulation.

UHV sector: It is expected to enter a boom cycle. In recent years, various power generation, transmission and distribution companies have significantly increased their new investment in high voltage, UHV power grids and high power generator sets (such as large-scale wind power, photovoltaic power generation, etc.), and have increased the upgrading of low voltage and low power equipment. During the “14th Five-Year Plan” period, the State Grid plans to build 38 UHV projects, with a total investment of 380 billion yuan. In 23, DC UHV completed the bidding and procurement of the Longdong-Shandong, Jinshang-Hubei, Ningxia-Hunan, and Hami-Chongqing projects, and AC UHV completed tenders for 2 lines in Sichuan, Chongqing and Huangshi. A total of 404 billion yuan of equipment was awarded, including 31.7 billion yuan for DC and 8.7 billion yuan for AC. It is expected that 4 new DC lines will be approved for construction in '24, and “2 and 5 direct” will be added to the current planned project in '25. It is expected that UHV will usher in a new peak round of construction in 23-25, and it is expected that 4 new DC lines will be added every year during the “15th Five-Year Plan” period. The company's traditional business is highly related to power system project planning and engineering progress. Since 2020, the company's performance and revenue structure have been adversely affected by the slowdown in industry investment. The current market demand has improved markedly, and it is expected to drive the company's performance growth in the future.

Profit forecasting and valuation

The company is a leading provider of liquid cooling solutions in China. The traditional business is expected to face an inflection point, while the emerging AI data center+energy storage business contributes new flexibility. The company's net profit for 24-26 is estimated to be 0.5/10/150 million yuan, and the current market value (closing price on May 7, 2024) is 72/37/25 times PE in 24-26, respectively. Based on an optimistic judgment on the medium-term sentiment in the various fields of the company's business, and considering that the industry's investment cycle and competitive landscape still have some uncertainty, the rating was adjusted to “gain”.

Risk warning

The UHV construction fell short of expectations; the acquisition of tender shares fell short of expectations; the company's gross margin fell short of expectations, etc.