Core views

The company released a semi-annual performance forecast. The first half of 2024 achieved net profit of 0.1315-0.1435 billion yuan, a year-on-year increase of 158.66%-182.26%; deducted non-net profit of 0.1286-0.1406 billion yuan, an increase of 171.89%-197.26% year-on-year. The company is a leading composite external insulation enterprise in the power transmission and transformation industry. Looking at UHV upward and downward cycle resonance of raw materials, has brought the company's performance flexibility; in the long run, overseas power grid investment will maintain a long-term boom, and the trend of composite external insulation will continue to progress, creating room for long-term growth. The company's performance in 2024-2026 is expected to be 0.329, 0.444, and 0.605 billion, respectively. The corresponding valuations are 33, 25, and 18 times, respectively, and the first coverage gives a “buy” rating.

occurrences

The company released the 2024 semi-annual results forecast

The company's semi-annual performance forecast shows that in the first half of 2024, net profit due to mother was 0.1315-0.1435 billion yuan, an increase of 158.66%-182.26% year on year; after deducting non-net profit of 0.1286-0.1406 billion yuan, an increase of 171.89%-197.26% year on year. If the median value is taken, Q2 achieved net profit attributable to mother of 0.0738 billion yuan, +104.8% year-on-year, and +15.7% month-on-month; realized deducted non-net profit of 0.0726 billion yuan, +110.6% year-on-year, and +16.9% month-on-month. At the same time, the company's revenue for the reporting period increased by about 30% year-on-year. If 30% were taken, Q2's revenue would be about 0.309 billion, +39.8% year-on-year and +33.8% month-on-month.

Brief review

Q2 High increase in revenue and performance

According to the forecast, the median Q2 performance reached 0.074 billion, the growth rate was over 100%, and the median revenue growth rate was close to 40%. The performance was excellent.

Domestic electricity transmission and transformation tenders are increasing, driving the number of insulator deliveries

Last year, the total number of tenders for six batches of power transmission and transformation equipment from the State Grid reached 67.7 billion yuan, an increase of 34.4% over the previous year. The delivery period began this year, which is expected to have a positive effect on the company's performance in the first half of the year.

UHV has entered the delivery cycle. In the company's history, UHV has brought great elasticity. The company has a high market share in the UHV substation insulators and UHV line insulators. In 2007-2018, the company's UHV substations and transmission lines received revenue of 51 million yuan and 76 million yuan respectively, accounting for 22.6% of the year's revenue. The gross margin was also higher than other voltage levels, bringing greater performance flexibility. Last year, construction of 4 DC UHV and 1 AC UHV began in China, and this year they have entered the delivery period one after another, which is expected to reproduce the flexibility of UHV cycle performance.

Overseas grid investment is booming, and the company is expected to fully benefit

In 2023, the company's overseas revenue reached 0.481 billion yuan, accounting for more than half of it reaching 50.2%, and gross margin reached 41.08%, which exceeded the company's overall level. According to the company's prospectus, the products sold overseas were mainly composite external insulation for substations, accounting for more than 85% in 2018. The three major overseas customers, ABB, GE, and Siemens, accounted for about 65% of overseas sales in 2018. Under the global energy transition trend, renewable energy installations are increasing year after year, and countries and regions such as the United States, the European Union, the Middle East, and Latin America have launched power grid investment upgrade plans. The three major companies (A BB, GE, Siemens) also raised their performance guidance expectations. The company actively lays out overseas production capacity and projects, and is expected to fully benefit from the global power grid investment boom cycle.

Reduced costs and significant recovery in profitability

Since the second half of 2022, the prices of the three main materials of silicone, winding yarn, and aluminum ingots have all declined markedly, and the company's cost pressure has decreased. Since the third quarter of 2022, the company's gross sales margin has increased sequentially for 6 consecutive quarters, and the gross margin for a single quarter has returned to over 45% in 2020.

Profit forecasting and valuation

The company's business is mainly divided into three business: composite outer insulation for substations, composite outer insulation for transmission and transformation lines, and rubber seals. It is expected that the company's substation composite insulation business will continue to maintain a high growth rate during the domestic UHV and overseas power grid investment boom cycles, and that the rubber seals business will continue to grow steadily. The insulation business outside transmission and transformation lines is the fastest growing sector. Composite cross load products are expected to open up room for growth overseas, and gross margin will increase as the share of composite cross load products increases.

The substation composite external insulation business will maintain a high growth rate as domestic grid investment rises, the UHV cycle, and overseas orders increase. The business is expected to maintain a growth rate of 35%-40% over the next three years; gross margin has recovered to 42.3% in 2023, and it is conservatively estimated to remain at 45% in the future.

The rubber seals business has continued to grow every year since 2016, and the gross margin has remained above 40%. The growth rate is expected to be between 20% and 30% in 2024-2026, and the gross margin remains around 45%.

The external insulation business for transmission and transformation lines is expected to become the sector with the highest growth rate, with the help of the UHV cycle, overseas business progress, and composite cross-sharing business. The transmission and transformation line business is expected to achieve a growth rate of more than 50% in 2024-2026, and the gross margin will increase year by year.

The company's revenue for 2024, 2025, and 2026 is estimated to be 1.396, 1.896, and 2.563 billion, respectively, and net profit to mother is 0.329, 0.444, and 0.605 billion, respectively. The corresponding valuations are 33, 24, and 18 times, respectively.

Risk analysis

1) Policy risks. The company's main customers are power equipment manufacturers and power generation, transmission and distribution companies. Major changes in the overall development plan of the global power industry may affect the company's performance.

2) Exchange rate risk. The company's main products are sold overseas. If there are major changes in foreign exchange management policies, RMB exchange rates, etc., it will affect the company's profit level to a certain extent.

3) Risk of fluctuations in raw material prices. The main raw materials used in the company's production include wrapping yarn, silicone rubber, aluminum ingots, etc. Changes in raw material prices directly affect the company's profit level.

4) Competition increases risk. The company has a high market share in the field of composite insulators for substations, but it faces many competitors in the field of line insulators, and competition is fierce. Increased competition will reduce the company's gross profit and net profit levels.

5) Sensitivity analysis: If the composite outer insulation growth rate of the company's substation in 2025 is 25%, 33%, and 41%, respectively, then the company's performance will be 0.425, 0.444, and 0.463 billion yuan, respectively.

6) Risk of stock price fluctuations: The company's stock price has fluctuated greatly recently. Investors should pay attention to the risk of falling after the stock price rises sharply.