Zongshen Power is a leading company in the domestic general engine and motorcycle engine industry. Since its establishment more than 40 years ago, it has continued to expand its capacity boundaries. The company's downstream customers are widely distributed, and aviation development products are used in well-known first-class drones such as Rainbow drones and Pterosaur drones; Tongji is positioned as the world's leading small smart green outdoor power and equipment system solution service provider, leading small energy system solution service provider and smart household goods provider; the downstream parts sector is mainly well-known brands of fuel vehicles and new energy vehicles.

Revenue and profit have grown steadily over the years. In 2003-2023, the company's total operating revenue increased from 0.993 billion yuan to 8.151 billion yuan. During the period, the CAGR compound growth rate was about 11.1%, and net profit to mother increased from 0.043 billion yuan to 0.362 billion yuan, and the CAGR was about 11.2%.

Motorcycle engine business: Definitely leading in the domestic market. In line with the trend of large displacement, the share is expected to increase the domestic space of the motorcycle market, which is growing rapidly. According to data from the Ministry of Public Security, the number of new motorcycle registrations reached 10.24 million in 2023, and the CAGR for the number of new motorcycle registrations in 2017-2023 was 13.29%. Zong Shen's market share in the motorcycle engine sector is about 17%, far exceeding that of Dragon 2.

Large emissions have become an industry trend in recent years. The company has technical experience, obvious scale advantages, and a broad product layout, and is expected to continue to gain share.

General machinery business: The industry has a wide range of application scenarios. Mergers and acquisitions have strengthened Dajiang's strength, and the vast majority of products in the general machinery industry are generator sets. Currently, the scale exceeds 40 billion US dollars, and the space is vast and growing. According to GMI data forecasts, the global generator set market size is about 41.6 billion US dollars in 2023, and the generator market is expected to reach 80.4 billion US dollars by 2032, or about 7.6% CAGR. In recent years, due to regional friction, China's exports to Europe have been booming.

Zongshen acquired Dajiang, extended the industrial chain to terminal products, strengthened the company's strategic depth through integration, and further strengthened its competitive advantage.

Energy storage business: Taking advantage of rapid growth, it was widely used to acquire Dongguan Lithium Intelligence in 2023 to expand the original products, which mainly focused on small energy storage, to golf cart power batteries and overseas energy storage. Lithium-ion golf carts are rapidly penetrating the European and American markets, and the golf cart power battery business has great potential. Overseas power grid systems are weak, and the potential demand for energy storage is huge. Entering energy storage is expected to share the dividends of rapid growth in overseas installed capacity.

Auto parts business: integrated advantages and manufacturing capabilities complement each other

Backed by China's strong automobile industry chain, the company has strong production capacity, and the auto parts sector is well under way. Currently, the company's products include everything from die-casting to machining. According to the company's plan, the production capacity of aluminum alloy die-casting parts can reach 0.05 million tons after full production, and the production capacity for high-end automotive parts can reach 20 million pieces. The company is a company with full-process production capacity. Strong manufacturing capabilities and integrated advantages complement each other, and occupy an advantageous position in competition.

Aero engine business: The “low altitude economy” has huge market space and broad development prospects. Zongshen Aviation Development Company, a holding subsidiary of the company, has now completed R&D, finalization and mass production of various aerodynamic products. The domestic and foreign market layout has basically been completed. As the domestic low-altitude economy continues to grow and the general aviation sector continues to open up, the company's aviation development business is expected to develop rapidly.

Profit forecasting and valuation

The company is a leader in the domestic engine and engine industry. Comparable companies are companies such as Longxin GM, Shenchi Mechatronics, Lifan Technology, Qianjiang Motorcycle, and Molding Technology; the average valuation of comparable companies in 2024 is 10.70X. We believe that Zongshen has excellent dynamic quality, competitive ability and leading position in the industry, broad prospects for new business, and sufficient growth momentum, and should enjoy a certain premium.

The company's total revenue for 2024-2026 is estimated to be 9.742/11.16/12.395 billion yuan, net profit is 0.633/0.708/0.796 billion yuan, and the compound annual growth rate of total revenue and net profit for the next three years is 15.00%/30.0%, respectively, corresponding to the current PE of 18.11/16.20/14.39X, which is covered for the first time, giving a “buy” rating.

Risk warning

Risk of terminal demand falling short of expectations, risk of fluctuating raw material prices, risk of trade friction, risk of new business expansion falling short of expectations