Investment highlights
For the first time, it covered Guangzhou Steel Gas (688548) to outperform the industry. The target price was 11.50 yuan. Based on the P/E valuation method, corresponding to the 2024 valuation multiplier 43X, the company is a leading comprehensive supplier of electronic bulk gases. The reasons are as follows:
The company broke the foreign monopoly and formed a 1+3 pattern with overseas giants. Due to the high entry threshold, the global and Chinese electronic bulk gas markets are monopolized by the three major foreign investors, namely Linde Gas, Liquefied Air, and Air Chemicals. The company is one of the few domestic enterprises in China to achieve large-scale supply of ultra-high purity electronic bulk gas. In 2023, the company won 24.6% of the bid capacity for new construction projects, and has formed a “1+3” competitive pattern with the three major foreign-funded enterprises. To promote the localization of materials in the field of integrated circuits and semiconductor displays, Guangzhou Steel Gas helps to intelligently manufacture Chinese chips and light up Chinese screens.
Helium is a key gas in the electronics business, and Guangzhou Steel has outstanding gas resource advantages. After nitrogen, helium is the second most widely used gas type of electronic gas. China's helium resources are relatively poor, and its dependence on imports exceeds 90%. The company is the first domestic-owned gas company in the global helium supply chain. In the current context where the domestic helium import business is dominated by foreign capital, the company has grown into the largest domestic helium supplier in the country.
The on-site gas production is a heavy snow track in Changpo, with high customer stickiness and strong profit stability. The on-site gas production business is exclusive, and the contract period is usually 15 years or more, and is deeply tied to downstream customers.
In addition, on-site gas production business charges include fixed charges (~ 40%) and variable gas fees, making profitability more stable. As the company's new on-site gas production projects are put into operation one after another, the company's profitability is expected to further increase.
What is our biggest difference from the market? The market is concerned about the future intensification of competition in the on-site gas production business. We believe that high specialization requirements, heavy asset models, and scarce helium resources have jointly built a moat for the industry.
Potential catalysts: Newly awarded projects have been put into operation, and helium gas sources have been further enriched.
Profit forecasting and valuation
We expect the company's 2024-25 EPS to be 0.27 yuan, 0.35 yuan, and CAGR of 20%, respectively. The current stock price corresponds to 34/26 times P/E in 2024/2025. Referring to comparable companies, considering that Guangzhou Steel is the target of scarce electronic bulk gas, leading customer certification, and outstanding advantages in newly won projects, we believe that the company should be given a certain valuation premium. We gave the company a target price of 11.5 yuan, with room for 26% increase, corresponding to 43/33 times P/E in 2024/25, which covered the “outperforming industry” rating for the first time.
risks
The purchase price of helium gas rose, and the purchase volume fell short of expectations; on-site gas production project customer performance deteriorated, and earnings fell short of expectations; industry competition intensified.