Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 5.544 billion yuan, a year-on-year increase of 36.59%, and net profit of 722 million yuan, an increase of 54.85%; in 2024Q1, revenue of 1,360 billion yuan, an increase of 24.54% year-on-year, and net profit of 197 million yuan, an increase of more than 100.45%. The downstream boom continued, and revenue and net profit increased dramatically

Benefiting from the continued high downstream boom in oil and gas, LNG, and FPSO, the company achieved revenue of 5.544 billion yuan in 2023, an increase of 36.59% over the previous year. In terms of profitability, the gross profit margin in 2023 was 31.40%, +0.89pcts year on year. Among them, the gross profit margin for export sales was 32.02%, +5.9pcts year on year. Domestic sales were affected by intense competition in the industry, and gross margin declined; the annual net profit margin was 13.24%, +1.56 pcts year over year. In the first quarter of 2024, the company's revenue and net profit continued to grow at a high rate of +100.45% to 197 million yuan, exceeding market expectations; the 24Q1 gross profit margin was 33.30%, up 4.66 pcts year on year, the net interest rate was 14.67%, and the year-on-year increase was 5.65 pcts. We judge that it was mainly affected by factors such as confirmed revenue from high gross margin orders such as LNG and FPSO, and increased exchange earnings.

Emerging downstream can be expected to blossom and grow more. Companies with increased profits in the middle and high-end valve volume are leading domestic industrial valves. While consolidating their leading position in the traditional oil and gas sector, they are continuously penetrating into emerging fields such as LNG, fine chemicals, nuclear power, and water treatment. Their revenue is growing more, and their ability to expand horizontally is strong. In 2023, the company continued to make breakthroughs in high-end products. High-end products such as high-pressure hard seal quick-cut ball valves, eccentric hemispherical ball valves, ultra-high pressure shut-off valves for BDO devices, and high-temperature butterfly valves were successfully delivered; production capacity of high-end valves was quickly released. In 2023, the output of ball valves and butterfly valves was +30% and +64%, respectively. With the release of high-end products, the company's profitability is expected to further increase.

Global energy demand is strong, and the company's performance is expected to continue to rise

The company entered the international market earlier, is mature in production technology and production process, has established stable cooperative relationships with many international customers, and followed them to expand new businesses and new markets. In 2023, the company's export sales achieved revenue of 3,028 billion yuan, an increase of 27.41% over the previous year, accounting for 54.6% of revenue, and in the past two years, export sales accounted for more than domestic sales. Looking forward to the future, global energy demand continues to grow and the demand structure is changing. Valves are an essential and important product in the energy industry. The company is expected to gain more domestic and international share with leading product technology and reliable product quality. The performance is expected to continue to grow and the leading position will continue to be consolidated.

Investment advice

The company is expected to achieve revenue of 6.646 billion yuan/7.759 billion yuan/8.918 billion yuan and net profit to mother of 886 million yuan/1,099 billion yuan/1,320 billion yuan. The price-earnings ratio corresponding to the current stock price is 16.6X/13.3X/11.0X, maintaining a “buy” rating.

Risk warning

Raw material prices rise, downstream demand falls short of expectations, new product development falls short of expectations, risk of exchange rate fluctuations, customer development falls short of expectations