Incident: On the evening of August 14, the company announced that Neway Industrial Materials (Dafeng) plans to participate in the auction for land use rights in Nanyang Town Industrial Park, Dafeng District, Yancheng City, plans to invest in high-end precision casting manufacturing projects, and plans to transfer land use rights and buildings in the existing factory area of Dafeng Economic Development Zone. It will use 0.22 billion yuan of its own capital to expand casting production capacity.

Key points of investment

Production expansion project description: After completion, the annual output is 5,000 tons of carbon steel precision castings and 5,000 tons of stainless steel precision castings, with an annual output value of about 0.26 billion yuan. The total investment is 220 million yuan, including 160 million yuan in fixed assets and 60 million yuan in working capital. The estimated construction period will be from March 2025 to April 2026, and the construction period will be 14 months (starting from the start of the project). Castings are one of the key factors in valve quality. Ultra-low temperatures and valves related to oil and gas refining have extremely high quality requirements. This expansion of casting production capacity shows that the company is optimistic about long-term development.

Almost all of the projects under construction have been fixed, and the additional capital expenditure shows long-term confidence: the 2023 annual report shows that the company's projects under construction are only 7 million, -94% year over year; current depreciation of fixed assets was 0.15 billion yuan, a slight increase of 0.016 billion yuan over the previous year. The book balance of machinery and equipment in the fixed asset category is only 0.57 billion yuan, and the peak of capital expenditure has long passed. The side effect of this new capital expenditure reflects the high level of prosperity in downstream oil and gas extraction, and the abundance of overseas orders.

The core focus is the Middle East & oil and gas order volume: 1) According to the downstream segment, oil and gas & refining processing is the most impressive: oil and gas extraction & petrochemical & LNG & refining orders account for about 60% of the company's total orders, and this portion has grown by about 50% since 2024. 2) According to regional division, orders from the Middle East & Africa are the most prominent, and overseas regions with the fastest growth rate. We believe that the high increase in overseas orders is mainly highly related to Chinese oil and gas companies “going global”. As a standard product with high reliability requirements, valves can be expected to benefit quickly by relying on tenders from leading domestic EPC contractors (CNPC, Sinopec, Jerry Group, etc.) (According to public information, CNPC's overseas investment is mainly concentrated in Middle Eastern countries such as Saudi Arabia, Kuwait, and the United Arab Emirates).

The company disclosed its 2024 semi-annual performance forecast on July 11: It is expected to achieve net profit of 0.437-0.572 billion yuan in the first half of 2024, an increase of 30% to 70% over the previous year. Among them, Q2 will achieve net profit of 0.24-0.375 billion yuan, an increase of 1%-58% over the previous year. [If calculated based on the 50%-70% net profit growth rate in the first half of the year, net profit to mother in Q2 was 0.307-0.375 billion yuan, an increase of 29%-58% over the previous year]

Profit forecast and investment rating: We maintain the company's 2024-2026 net profit forecast of 0.95/1.12/1.3 billion yuan. The current market value corresponds to PE of 14/12/10 times, and maintains a “buy” rating.

Risk warning: geopolitical risks, rising raw material prices, risk of exchange rate fluctuations, oil and gas industry cycle fluctuations