Core views:

Chuanyi Co., Ltd. is one of the three major instrumentation bases in China. It is also currently the largest industrial automation instrument company in China, with the largest variety and the strongest system integration capabilities. In 2017-2023, the company's revenue/net profit CAGR was 15.47%/29.33%, and the performance grew steadily. At the industry level, in the context of autonomy and control, there is huge demand for domestic instrument replacement; at the company level, the performance of main products is continuously upgraded, and the product spectrum is further improved. It is expected that in the future, it will continue to consolidate competitiveness through service advantages and project experience accumulation, and become a leader in the industrial automation instrument industry under the major trend of domestic substitution.

Big industries nurture big companies, and there is plenty of room for domestic alternatives.

The industrial control system equipment industry where Chuanyi Co., Ltd. is located is the largest branch industry in the instrumentation industry. It is an important technical means and support for maintaining national economic security and achieving industrial modernization. Judging from mature overseas market experience, the process automation industry has given birth to many century-old foreign brands such as Emerson, Honeywell, Siemens, and E+H. According to data such as industrial control networks and “Control Valve Information”, the main products covered by Chuanyi (pressure transmitters, control valves, flow meters, analytical instruments, etc.) have a total domestic market size of about 126 billion yuan, and the localization rate is low. Based on Chuanyi's total revenue of 7.411 billion yuan (including turnkey projects) in 2023, the company's market share is only 5.88%, and there is plenty of room for future growth.

Competitive advantage: Product lineage, R&D, manufacturing and sales build a deep moat.

① Perfect product lineage: The company is positioned in the middle and high-end fields, covering 8 series of products such as intelligent actuators, intelligent transmitters, intelligent control valves, intelligent flow meters, level meters, temperature meters, analytical instruments, and control equipment and devices, covering almost all product categories required for process automation. It has the ability to provide overall solutions for the industry, and the product line continues to expand, and the product line continues to expand, and the product quality continues to move towards high-end, benchmarking overseas;

② Excellent R&D capacity: Year-round R&D investment and scientific R&D mechanism, with accumulated manufacturing experience since the construction of the country's third-tier construction in the 1960s. In 2023, the company's R&D expenses were 0.524 billion yuan, an increase of 15.16% over the previous year, and the R&D cost rate was 7.08%; according to the 2022 equity incentive plan, the 2023-2025 R&D cost rate is not less than 7%; ③ Self-made core components: Self-made core production tools and key components, a deep industrial moat formed through supply chain integration and autonomy to ensure the safety and stability of the supply chain. According to the company's announcement, by the end of 2023, the company had built 43 intelligent production lines, 7 digital workshops in Chongqing, and 2 innovative demonstration smart factories in Chongqing, with a 20% year-on-year increase in production capacity for core products in 2023;

④ Service-driven sales: The process industry has extremely high requirements for products and services. The company uses a direct sales model and market-based incentive mechanism to drive product sales with technical sales services and establish customer stickiness. In 2023, the company had 1,492 sales personnel, accounting for 28.30%, and a sales expense ratio of 13.10%.

Catalytic factors: state-owned enterprise reform+equipment update+autonomous and controllable three arrows go hand in hand.

① High-quality targets for state-owned enterprise reform: the industrial instrument industry has high barriers, large upfront investment, high sinking costs, and a high entry threshold. Chuanyi Co., Ltd. is backed by the Chongqing State-owned Assets Administration Commission. It naturally has resource advantages and qualification advantages, empowering downstream petroleum and petrochemical, iron and steel metallurgy, electricity, environmental protection and other pillar industries of the national economy;

② Driven by the equipment renewal policy, downstream capital expenditure is expected to be repaired: in the short term, in the context of the equipment update policy, petrochemicals, metallurgy, etc. are expected to usher in capital expenditure recovery. According to our estimates, equipment updates in the petrochemical industry are expected to bring more than 40 billion yuan in instrument demand; in the medium to long term, increased market concentration and increased automation level in the process industry are expected to support the upward trend in the industry's capital expenditure;

③ The core goal of autonomy and control is prominent: industrial instrumentation is an important technical means and support for maintaining national economic security and achieving industrial modernization. As the domestic process industry's acceptance of domestic instruments increases and awareness of the autonomous and controllable situation deepens, and the general trend of domestic instrument substitution, we are optimistic that domestic high-end industrial instrument companies represented by Chuanyi Co., Ltd. will stand out.

Investment advice:

We expect the company to achieve revenue of 8.132/9.043/9.963 billion yuan in 2024-2026, with year-on-year growth rates of 9.74%/11.20%/10.17%, and net profit of 0.8/0.928/1.075 billion yuan, respectively. The year-on-year growth rates are 7.56%/15.99%/15.81%, respectively. The corresponding PE is 11X/9X/8X, respectively. The first coverage gives a “buy-A” rating. The target price for 6 months is 20.28 yuan, corresponding to 2024 13X dynamic price-earnings ratio.

Risk warning: The macroeconomic downturn affects capital expenditure in the process industry. Market competition intensifies, the localization process falls short of expectations, technology research and development falls short of expectations, and profit forecasts fall short of expectations.