Deeply involved in the foundry processing industry, and the business performance is steady and improving
Liande Co., Ltd. has been deeply involved in the foundry processing industry for more than 20 years. It has expanded production capacity and market through many mergers and acquisitions. Currently, it has both casting and machining production capacity, and is expanding into the hydraulic field. The company is mainly engaged in R&D, design, production and sales of high-precision mechanical parts and precision cavity mold products, and provides one-stop service from casting to finishing. The company's products include precision parts for the manufacture of compressors, construction machinery, injection molding machines, and complete food machinery.
The company's shares are concentrated, and the actual controllers have increased their holdings, showing confidence. The actual controllers of the company are Sun Yuan and Zhu Qinghua. In total, they hold 65.66% of the company's shares, and the shareholding structure is concentrated. Meanwhile, Sun Yuan increased his shareholding of the company's shares by 424,966 shares through centralized bidding on 2024/2/7, accounting for 0.18% of the company's total share capital, and will continue to increase his shares through centralized bidding in the future, demonstrating confidence in the company's long-term development.
The company's operating performance has been improving steadily in recent years. The company's total revenue from 2020 to 2024Q1 was 6.70, 7.99, 11.21, 12.11, and 290 million yuan, respectively, up -1.82%, 19.21%, 40.29%, 8.09% and 3.43%, respectively; realized net profit of 1.67, 1.61, 2.48, 2.48, 2.51, and 0.52 billion yuan, with year-on-year growth rates of -0.93%, -4.01%, 54.27%, 1.45% and -8.49%, respectively.
We believe that the company's profitability will remain at a high level. Profitability is one of the market's concerns about Liande shares. The main reasons include: 1. The possibility of RMB appreciation will adversely affect the profitability of overseas business; 2. The profitability of the new wind power business may be lower than that of compressor components and engineering components. We believe these concerns are valid, but we should not overlook factors that have a positive impact on profitability, such as:
1. Liyuan Jinhe, Liyuan hydraulic management and profitability improvement; 2. Further increase in scale has a positive impact on profitability. In summary, we believe that the company's profitability is expected to remain at a high level, so there is no reason to worry too much about this.
The foundry industry is the main process for metal forming. The North American market maintains a high level of prosperity. The casting process costs are low, the process flexibility is high, and complex shapes and large castings can be obtained. The product has good comprehensive performance. It has certain comparative advantages over other molding processes such as forging, rolling, welding, and punching. It is currently the main process method and method for metal forming. As an important upstream of the machinery manufacturing industry, the development status of the foundry industry is closely related to the global economic development situation. Global casting production remained around 110 million tons in 2017-2022.
The US casting market remains booming and is expected to continue to grow steadily from 2024 to 2028. According to the American Foundry Association (AFS) 2024 Forecast and Trend Report, US metal foundries performed strongly in 2023, and the total revenue of the foundry industry is estimated at $50.1 billion, up 5.2% from 2022. From 2018 to 2023, foundry revenue grew at an average annual rate of 3.9% per year. Meanwhile, the Association expects the annual revenue growth rate of the foundry industry to be 4.6% from 2024 to 2028.
Sand casting has a harsh working environment, and production capacity is expected to gradually shift to emerging markets. As industrially developed countries gradually withdrew from labor-intensive or labor-intensive industries, overseas foundry capacity demand and supply did not respond. The supply chain of the equipment manufacturing industry is dominated by multinational companies and introduced to developing countries with high market demand and abundant labor resources.
In terms of the compressor market, air compressors and refrigeration compressors are the most widely used compressors, accounting for more than 80% of the total compressor market. The global air compressor market is $55 billion in 2022, the refrigeration compressor market is $16 billion, and is expected to grow 4.75% in 2023. Looking forward to the future, with carbon peaks and carbon neutrality requirements, as well as the transformation of China's industrial economy and manufacturing upgrading, emerging business application fields will gradually rise, bringing new development opportunities to the compressor industry.
In the construction machinery market, domestic demand is expected to bottom up; at the same time, Caterpillar is an important customer of the company's construction machinery, and its prosperity is improving. From a revenue perspective, benefiting from rising commodity prices, Caterpillar's revenue in 2022 and 2023 was US$594 and 67.1 billion, respectively, with year-on-year growth rates of 16.6% and 12.8%, respectively. In terms of backlog orders, as of 2024Q1, Caterpillar still has an order backlog of $27.9 billion (mainly an increase in the energy and transportation sector), with sufficient orders.
The release of production capacity brings growth expectations, and hydraulic parts are viewed as options, and hope that product quality and supply chain management will be the company's two major advantages, binding high-quality overseas customers. The company's main customers, such as Johnson Controls, Ingersoll Rand, Carrier Air Conditioning, and McQuay, are all leading companies in the global commercial air conditioning industry. Eight of the top ten customers have cooperated with the company for more than 10 years. In the process of cooperation, customer product performance and demand have continued to improve. With its own R&D strength and R&D experience, Liande Machinery has participated in the R&D, design or improvement process of most of the customer's new products. The company participated in new product development projects for customers such as Johnson Controls, Ingersoll Rand, Carrier Air Conditioning, and McQuay, and undertook some R&D functions for major customers. The corresponding products have remarkable customization characteristics, high added value, and strong bargaining power.
The Matilda project is about to be put into operation, bringing growth expectations. As the largest production and construction project in the company's history, the Matilda project is expected to be put into operation in the first half of this year. After full delivery, production capacity of large high-precision mechanical parts will be added to 14,600 sets/year, including 2,000 sets of compressor parts, 7,000 sets of construction machinery parts, 3,000 sets of food machinery parts, and 2,600 sets of large-scale wind power equipment components. At the same time, the Mexican plant is also expected to be put into operation in '25, increasing machining capacity while reducing policy risks.
The Liyuan Jinhe Technical Reform Project has successfully reached production, and it is expected to reverse losses in 24 years. Liyuan Jinhe's technical reform project has successfully reached production and has reached a relatively full state of production. By establishing a new resin sand casting production line, it has collaborated with the existing business of Liande Co., Ltd. At the same time, the company has also carried out rectification actions such as new customer development and cost control in Liyuan Jinhe's original hydraulic business. We believe it is expected to reverse losses in 24 years.
The hydraulic component barrier is high. With customer advantages and precision casting capabilities, the options can also be cashed out. Hydraulic parts are a high-barrier circuit, and it is not easy to break through in this field. The company has two major advantages. One is that it has a long-term cooperative relationship with Caterpillar, a leading international company, and the other is that it has excellent capabilities in the field of precision castings, so we think this option can also be realized.
Profit forecasting and valuation
In summary, we expect the company's revenue to be 1,482, 18.07, and 2.68 billion yuan in 2024 to 2026, with year-on-year growth rates of 22.35%, 21.89%, and 20.03%, respectively; net profit to mother of 2.95, 3.49, and 410 million yuan, with year-on-year growth rates of 17.43%, 18.31%, and 17.36%, respectively.
Casting manufacturers Haomai Technology and Yingliu Co., Ltd. were selected. Construction machinery parts manufacturers Hengli Hydraulic and Changling Hydraulic were selected as comparable companies. The company's valuation is low, and new growth is expected to begin as production capacity is released. The company's 2024-2026 performance corresponding PE was 13.39, 11.31, and 9.64 times, respectively, and raised to a “buy” rating.
Risk warning
Major customer development falls short of expectations; risk of production capacity release falling short of expectations; risk of fluctuations in raw material prices.