Incident: Dunan Environment announced that the company plans to acquire 62.95% of Shanghai Dachuang's shares held by counterparties such as Jia Weixin and Dachuang Partners in cash, at a transaction price of 215 million yuan, and increase Shanghai Dachuang's capital by 30 million yuan. After the transaction was completed, Dun An Environmental held 65.95% of Shanghai Dachuang's shares, and Shanghai Dachuang was included in the scope of the company's merger. We believe that this transaction is expected to improve the company's NEV thermal management product line, strengthen parts research and development capabilities, and help the company develop its NEV parts business rapidly.

Dunan is actively expanding its automotive thermal management business and plans to acquire Shanghai Dachuang to complete the waterway valve product line: Dunan's NEV thermal management products are gradually being recognized by the market. Among them, refrigerant valve products have a strong competitive advantage. Shanghai Dachuang is mainly engaged in R&D, production and sales of auto parts products such as automotive OBD intelligent electronic control products and NEV thermal management products. Its products cover the two major fields of NEV thermal management and fuel emission components. Shanghai Dachuang achieved revenue of 91.543 million yuan in 2023, achieving net profit of 12.526 million yuan; 2024Q1 achieved revenue of 20.964 million yuan and realized net profit of 6.084 million yuan.

The performance promise for this transaction is that the cumulative operating income of Shanghai Dachuang in 2024-2026 should not be less than 901 million yuan, and the cumulative net profit should not be less than 71.0 million yuan. We believe that this transaction can quickly complete the company's NEV thermal management waterway valve product line, increase the bicycle value of the company's products, strengthen the positive traction of parts development from a system integration perspective and create conditions for expanding other products, and help the company expand the energy-saving vehicle parts circuit.

Shanghai Dachuang's core team is experienced, and mergers and acquisitions are expected to strengthen R&D capabilities: Shanghai Dachuang has strong R&D capabilities and product cost advantages. It has become a parts supplier for automakers such as Great Wall, Changan, Cyrus, SAIC, Geely, Ideal, Yutong, and Heavy Duty Truck. Thermal management products for new energy vehicles have also been designated by many OEMs. The core members of the team have an average of more than 15 years of experience in the auto parts industry and have a deep understanding of the auto parts industry. After the transaction is completed, the company will absorb the existing core team of Shanghai Dachuang and continue to introduce outstanding talents to strengthen the talent team in the company's NEV thermal management business, which is expected to enhance market competitiveness and help the auto zero business revenue and performance increase rapidly.

Sales of Dunan refrigeration parts grew rapidly in April-May: According to industry online data, in April-May, Dunan globe valves, four-way valves, and electronic expansion valves were YoY +29.7%/+7.8%/+26.9%.

Since the beginning of the year, air conditioning manufacturers have actively scheduled domestic and foreign sales, driving a continuous increase in demand for upstream refrigeration components. We believe that, benefiting from continued demand for overseas inventory replacement, and the “trade-in” policies for home appliances in various regions to stimulate the release of demand for air conditioning upgrades, China's air conditioning companies' production schedules continue to grow at a high rate, driving sales of refrigeration components to continue to grow at a high rate. Furthermore, as energy saving and environmental protection requirements increase, the share of high-efficiency inverter air conditioners is expected to drive continuous growth in demand for electronic expansion valves. As a leading enterprise in the refrigeration components industry, Dunan is expected to fully benefit from increased demand in the industry.

Investment advice: Dunan is a leading enterprise in the refrigeration components industry. It is actively expanding the thermal management business of refrigeration equipment and new energy vehicles, and profitability is expected to continue to increase. The company's EPS for 2024 to 2026 is expected to be 0.87/1.02/1.25 yuan respectively, maintaining a buy-A investment rating, giving the company a dynamic price-earnings ratio of 15 times in 2024, which is equivalent to a six-month target price of 13.05 yuan.

Risk warning: Competition in the industry has intensified, raw material prices have risen sharply, and customer development falls short of expectations.