1H24 results are in line with our expectations

The company announced its 2024 semi-annual report: 1H24 revenue was 0.71 billion yuan, down 7.27% year on year; net profit to mother was 0.1 billion yuan, up 7.12% year on year. Benefiting from the improvement of the company's lean management capabilities, the company's profit side achieved high year-on-year growth. Looking at a single quarter, 1Q24/2Q24 revenue was 0.28/0.44 billion yuan, 2Q24 revenue increased 14.7% year-on-year. The company continued to improve production capacity, and the advantages of scale were highlighted. Our review is as follows:

The gross margin of natural gas chemical equipment and oil and gas equipment increased significantly. 1) 1H24's natural gas chemical equipment/ new energy high-end equipment/ petroleum refining equipment/ coal chemical equipment/ oil and gas equipment revenue +16.22%/-122.47%/-6.31%/-1.12%, gross margin +10.33/+2.72/-8.13/ -4.01/+3.39 ppt. 2) The comprehensive gross margin of 1H24 reached 18.5%, a year-on-year decrease of about 4.19ppt, mainly due to the decline in revenue from petroleum refining and chemical equipment and coal chemical equipment.

The rate of expenses for the period was well controlled. In recent years, the company has continuously adjusted its product structure and continued to focus on specialty container products, mainly high-end alloys, etc., to enhance the company's efficiency. The 2Q24 sales/management/R&D expense ratio was -0.24/-0.56/-1.03ppt, respectively, and the 1Q24/2Q24 net profit margin was +5.61/-0.57ppt year-on-year, respectively.

The pace of delivery of high-end new energy equipment and natural gas chemical equipment is progressing smoothly. 1) In terms of business, 1H24's revenue share of natural gas chemical equipment increased to 41%, an increase of about 8.2 ppt over the previous year. The share of new energy high-end equipment revenue increased to 34.9%, an increase of about 8.1 ppt over the previous year. 2) During the reporting period, the company's first domesticated 1 million ton/year methanol plant synthesis tower was successfully delivered; the market share of oil and gas skid-mounted equipment gradually expanded; on the basis of consolidating orders for special and proprietary products such as waste cookers/steam generators and second-stage cooling, the company successfully broke through orders for gas heaters, air coolers and other products in gas turbine projects. We expect the growth trend to continue to increase in the future.

Development trends

High-end process equipment production capacity is expected to continue to increase. Pressure vessels are a capital-intensive industry and are constrained by large-scale manufacturing capacity. The company completed a fixed issuance of 0.581 billion yuan in 2023Q1. Based on the 21,800 tons/year equipment production capacity at the end of 2022, the design capacity was increased by 8,400 tons/year (about 40% increase flexibility, and the construction cycle is 1.5 years). According to the company's announcement, the 2024Q1 high-end process equipment has been completed and put into production and operation.

Profit forecasting and valuation

Affected by the reduction in capital expenditure in the petroleum refining and chemical sector, we expect the company's refining and chemical equipment revenue to decline in 24/25, so the 24/25 revenue will be reduced by 4.5%/4.9% to 1.7/2.14 billion yuan, and the net profit to mother will be reduced by 5.0%/5.2% to 0.18/0.22 billion yuan. The current price is 14/11 times the 24/25 P/E. Due to the recent decline in the valuation of A-share pressure vessel equipment, we lowered our target price by 12% to 11.3 yuan, corresponding to an increase of 23.2%, and maintained a “outperforming industry rating”. The target price corresponding to the 24/25 P/E was 17/14 times.

risks

The risk of intense market competition and the risk of fluctuations in profitability in a single quarter.