As the supply-side reform continues to deepen, the concentration of the civilian explosives industry and the integration of development have become an inevitable trend. The overall industry has gradually shifted from a production-based business model focusing on the production and sales of civilian explosives to a production and service-oriented model that also considers blasting services. From the demand side, on the one hand, the issuance of trillions of national debt in China is conducive to infrastructure construction investment, and the exploration efforts are increasing under policy support. On the other hand, going abroad has gradually become a new growth point. Therefore, from the supply and demand sides and the development trend of the industry, it is recommended to focus on leading enterprises with strong integrated service capabilities and civilian explosive enterprises in areas that may have significant demand increases in the future under policy guidance: Explosive Co.,Ltd. (002096.SZ), Guangdong Hongda Holdings Group (002683.SZ), Anhui Jiangnan Chemical Industry (002226.SZ), and Tibet Gaozheng Explosive (002827.SZ).

Sinolink Securities' main points are as follows:

Supply-side: The flammable, explosive, and highly dangerous nature of civilian explosives determines the industry's regulatory attributes, which are subject to strong supervision by laws and regulations and relevant departments. Therefore, the qualification requirements of the civilian explosives industry have created natural barriers to entry into the industry. Furthermore, in recent years, relevant departments have successively issued policies to continuously promote the optimization of the industry's product structure while encouraging mergers and reorganizations, increasing industry concentration, and setting clear goals. As supply-side reform continues to deepen, the advantages of leading enterprises are gradually emerging.

Policy direction one: Support mergers and acquisitions to increase industry concentration. According to the "14th Five-Year Plan" for the safe development of the civilian explosive industry released by the Ministry of Industry and Information Technology, one of the development goals of China's civilian explosives industry during the "14th Five-Year Plan" period is to "continuously improve industry concentration, further reduce the number of enterprises, and form 3-5 large civilian explosive integrated enterprises (groups) with strong industry driving force and international competitiveness." In terms of specific indicators, the number of production enterprises in China's civilian explosives industry is expected to decrease from 76 in 2020 to less than 50 by 2025, and the proportion of the total value of output of the top 10 civilian explosive enterprises in the industry is expected to increase from 49% in 2020 to over 60%.

Policy direction two: Encourage the integrated development of the civilian explosives industry and promote the transformation of enterprises from production-based to production and service-oriented. Since 2016, the Ministry of Industry and Information Technology has successively issued a series of policies, such as the "Development Plan of the Civilian Explosive Industry (2016-2020)", to encourage civilian explosive enterprises to transform from traditional production-based business models to production and service-oriented models, and to strengthen the deep interconnection and synergy of the industry chain. Driven by policy guidance and industry development, the blast service revenue of domestic civilian explosives industry production enterprises increased from 14 billion yuan in 2017 to 33.8 billion yuan in 2023, with an average annual compound growth rate of about 16%. From January to May 2024, domestic civilian explosive production enterprises achieved a cumulative blasting service revenue of 11.736 billion yuan, a year-on-year increase of 0.75%.

Policy direction three: Continuously optimize the product structure and vigorously promote the application of on-site mixed explosives and electronic detonators. According to the "14th Five-Year Plan" for the safe development of the civilian explosives industry, the proportion of on-site mixed explosive production capacity licenses held by enterprises should reach 35% or more by 2025; at the same time, the policy of strict implementation of the industrial detonator reduction and replacement with industrial digital electronic detonators will be fully promoted, and industrial digital electronic detonators will be promoted comprehensively. Except for retaining a small amount of production capacity for export or other licensed special purposes, the production of other industrial detonators except for industrial digital electronic detonators should be stopped by the end of June 2022 and sales should be stopped by the end of August 2022.

Demand side: The resonance of domestic and foreign demand has formed strong support for the medium and long-term demand of the civilian explosives industry.

From the perspective of domestic demand, the overall fixed asset investment of the main downstream demand areas represented by mining and infrastructure construction in China has shown a steady upward trend. Moreover, under the background of ensuring energy supply and strategically exploring and developing mineral resources, the fixed asset investment of related industries is expected to continue to grow.

From the perspective of foreign demand, Chinese civilian explosive enterprises have successively laid out overseas markets. The overseas market resources represented by the countries along the "Belt and Road Initiative" are rich, but the infrastructure construction and related supporting levels are relatively low. Therefore, the demand for civilian explosives-related items is considerable, providing an opportunity for Chinese civilian explosive enterprises to develop overseas markets.

Risk reminder: Risk of raw material and product price fluctuations; risk of downstream demand falling short of expectations; risk of major safety accidents; risk of international trade friction; risk of policy changes; risk of technological iteration; risk of changes in corporate competitive strategies.