Incidents:

On August 30, 2024, Hongchuan Wisdom released its 2024 semi-annual report.

2024H1 achieved revenue of 0.736 billion yuan, -4.83%; net profit to mother of 0.133 billion yuan, -17.05%; net profit after deducting non-return of 0.108 billion yuan, -29.75%; 2024Q2 achieved revenue of 0.356 billion yuan, -10.40% year over year; net profit to mother 0.073 billion yuan, -20.30% year on year; net profit without return to mother 0.051 billion yuan, same Compared to -44.11%.

Investment highlights:

2024H1 storage tank revenue declined slightly, and the demand-side marginal repair trend was initially affected by weak demand from the downstream chemical industry. 2024H1's terminal storage tank business revenue was 0.638 billion yuan, -6.98%; chemical warehouse revenue was 0.039 billion yuan, -3.75%; and other businesses totaled 0.059 billion yuan, +26.18% year over year. The decline in turnover was compounded by a slowdown in the pace of production capacity climbing. The gross profit margin of 2024H1 terminal storage tanks was 51.86%, -7.19pct year on year. There are signs of improvement on the marginal demand side. According to data from the National Bureau of Statistics, inventories of finished products produced in the petroleum, coal and other fuel processing industries were +4.9% year-on-year in July 2024, and inventories of finished products produced at the end of the period in the chemical raw materials and chemical products manufacturing industry were +6.0% year-on-year.

Storage tank mergers and acquisitions continue to expand, opening a second curve for warehouses under construction

In May 2024, the company acquired 60.00% of Rizhao Hongchuan Storage Co., Ltd. through a merger of enterprises not under the same control. The target is located in the Bohai Rim economic zone. The service radius covers the major land refining provinces of Shandong and Beijing-Tianjin-Hebei regions, providing strategic support for the company to develop the Bohai Rim market. As of 2024H1, the company's operating tank volume increased to 5.1869 millionm3, +18.26% over the same period last year. In addition, the chemical warehouses under construction have a capacity of 0.0941 million square meters, distributed in Chengdu, Nantong, Suzhou, and Changzhou. After completion, the area of the existing warehouse increased by +144.99%. It is optimistic that the regional layout of the company's warehouses and tanks will gradually improve, and the synergy effect of assets within the region is expected to increase.

The attributes of strong and scarce assets will not change. I am optimistic that turnover restoration resonates with the company's strong asset scarcity. Under marginal recovery on the demand side, production capacity climbing and turnover restoration resonate, and growth and profitability are expected to gradually recover. Looking at the medium to long term, the company's business model is clear and the industry pattern is concentrated. In the future, it is expected that growth will gradually be realized along the path of first main business terminal storage tank storage, second main business chemical warehouse, and mergers and acquisitions mainly supported by self-construction.

Profit forecast and investment rating We expect Hongchuan Smart's revenue for 2024-2026 to be 1.587 billion yuan, 1.895 billion yuan and 2.216 billion yuan, respectively, +3%, +19%, and +17% year over year; net profit to mother will be 0.272 billion yuan, 0.352 billion yuan and 0.453 billion yuan, respectively, -8%, +29% year over year; corresponding PE will be 18.25 times and 14.10 times, respectively Compared to 10.96 times, short-term demand fluctuations did not change the asset's high quality attributes. The current stage layout and cost performance ratio are prominent, and the “increase in holdings” rating is maintained.

Risks indicate that demand falls short of expectations, production accidents, mergers and acquisitions falling short of expectations, risk of impairment of goodwill, major policy changes, and large-scale natural disasters.