The main force in nuclear power engineering construction, welcoming the boom in the industry

China Nuclear Construction is the main force in China's nuclear power engineering construction. We believe that as the pace of nuclear power unit approval has accelerated since '22, the company is expected to take the lead in benefiting from the boom in the industry. We forecast the companies' net profit to mother of 2.43/2.83/3.27 billion yuan, respectively. Using the segmented valuation method, a comparable nuclear power/industrial and civil construction company Wind had a consistent average expected average of 15x/6xPE, giving the nuclear power project 1.693 billion net profit to mother in 24 years; considering that the company's industrial and civil construction business still had some risk of impairment that had not been released, we gave industrial and civil construction and other businesses 0.734 billion net profit to mother in 24. Combining the two businesses, we gave the company a 24-year target market value of 29.1 billion yuan and a target price of 9.65 yuan. For the first time, we gave it a “buy” rating.

The rise in the nuclear power boom is accelerating, and nuclear power projects are expected to take the lead in benefiting

As a clean, efficient, and stable form of energy, nuclear energy plays an important role in ensuring energy security and promoting energy transformation. In 2019, China's nuclear power resumed normalization approval. From 2021 to 2023, China's nuclear power investment maintained a growth rate of more than 20%, and 5M24 nuclear power investment continued to increase by +26% over the same period last year. According to the China Nuclear Energy Association, nuclear power generation will account for about 10% of China's power structure by 2035. Based on this, we estimate that the average number of approved nuclear power units per year in 24-28 will remain at 8-10. As the front end of the industrial chain, nuclear power engineering is expected to be the first to benefit from the acceleration of nuclear power approval and investment, and due to the special nature of the nuclear power industry, the nuclear power engineering construction market is not fully competitive. In particular, there are high barriers in the field of nuclear island construction. Among them, China Nuclear Construction has a leading edge.

Nuclear power engineering orders and revenue have increased rapidly, which is expected to improve the company's profitability and cash flow since 2022, with the acceleration of nuclear power unit approval, the company's new nuclear power project orders exceeded 38 billion yuan for two consecutive years, the year-on-year growth rate of uncompleted contracts for nuclear power projects at the end of 22/23 reached 32.9%/52.3%, respectively. The 24Q1 company's new orders for nuclear power projects continued to accelerate, and new and on-hand orders reached 11.9/95.6 billion yuan respectively, +133.1%/+58.0% over the same period last year. The average gross margin of the company's nuclear power projects in 21-23 was 14.4%, which is significantly higher than other businesses. We estimate that the net profit of the company's nuclear power engineering in 23 was 60.7%. As nuclear power engineering construction accelerates, we expect the company's nuclear power project revenue to be 31.1/37.6/43.2 billion yuan respectively in 24-26, with year-on-year growth rates of 30.1%/20.9%/14.7%, respectively. Continued increase in the share of nuclear power engineering is expected to drive the improvement of the company's overall profitability and cash flow.

Industrial and civil construction business structure optimization and superposition PPP projects have entered the operation period, and the risk of impairment of receivables is expected to mitigate the company's credit impairment losses by 1.36/1.91 billion yuan respectively in 2022. The increase in accounts receivable impairment is an important factor affecting the company's profits. Our neutral hypothesis estimates that the company's combined accounts receivable impairment was 0.83 billion yuan in 24, a decrease of 0.23 billion yuan compared to 23. We believe that as the share of nuclear power projects with better cash flow increases in industrial and civil engineering businesses The share of housing construction business has declined, investment in PPP projects has been reduced one after another, and the risk of impairment of the company's accounts receivable is expected to slow down.

Risk warning: The pace of nuclear power approval falls short of expectations, project progress falls short of expectations, accounts receivable risk.