From equipment to operation, leading the domestic air separation industry
Hangzhou Oxygen Co., Ltd. is a large-scale domestic air separation equipment and industrial gas manufacturer. The company takes the gas industry as the core, and is supported by equipment and engineering business to cultivate new business growth points such as specialty gases, new energy, and technical services. The company's revenue CAGR for 2010-2023 was 12%, and net profit CAGR to mother was 10%. Recently, in the face of an unfavorable market environment, the company showed development resilience. In 2023, it achieved operating income of 13.31 billion yuan, an increase of 4.0% over the previous year, and achieved net profit attributable to the owners of the parent company of 1.22 billion yuan, an increase of 0.5% over the previous year. The first half of 2024 achieved operating income of 6.73 billion yuan, an increase of 4.4% year on year; realized net profit attributable to owners of the parent company was 0.437 billion yuan, a year-on-year decrease of 16.76%.
Pipeline gas solidified the foundation, and the retail business brought flexibility to performance
The industrial gas industry has a high ceiling, and domestic manufacturers have great potential. China's industrial gas market started late but developed rapidly. The market size grew from 121.1 billion yuan in 2017 to 179.8 billion yuan in 2021. The CAGR is 10%, and the scale will reach 284.2 billion yuan in 2026.
Industrial gases are highly versatile and generally in line with economic development. The proportion of outsourcing in China is expected to increase further, and the retail model is expected to bring about an increase. In the domestic gas outsourcing market, the share of domestic capital is gradually increasing, and the supply of high-threshold gas continues to break through.
Based on pipeline gas, models, categories, and regions expand in multiple directions. 1) By the end of 2023, the company's gas investment had accumulated a production volume of 3.2 millionNm3/h. The pipeline gas operation model passed through the cycle. After the depreciation period of some operating projects expires, gross margin may improve, further consolidating the company's performance foundation. 2) Continuing regional expansion to reduce the impact of regional fluctuations. The company has established eight major regions across the country and signed a new Indonesian gas project in 2023, taking the first step in the internationalization of the gas industry. 3) The company's retail gas business continues to be rich. On the basis of improving the company's brand and channel construction, retail gas is expected to bring flexibility to the company's performance when market sentiment increases. 4) The special gas products produced by the company include rare gases, high purity, ultra-high purity gases, electronic bulk gases, etc. In the future, it is expected that specialty gases will be used as an important business segment to achieve production and sales of more high-value-added gas products and increase the overall gross profit margin of the gas business.
Leading air separation equipment, overseas layout+product development drive
The company's leading position in air separation equipment is stable, and its share is increasing year by year. The market share of oxygen production capacity in 2020 was 43.21%. The company's air separation equipment has two functions: supplying gas subsidiaries and supplying external customers. In recent years, the internal sales ratio is about 20%, which not only contributes to the company's profits, but is also a solid foundation for the company's gas operation industry.
Actively expand overseas markets for air separation equipment. The foreign trade contract amount of new equipment sales contracts signed in 2023 reached 0.908 billion yuan, accounting for 14.03%. As of July 2024, the company's equipment has been exported to more than 40 countries, and foreign trade orders have exceeded the total of 2023. The company's horizontal promotion and application in the field of cryogenic technology, petrochemical equipment and hydrogen energy continue to expand.
Profit forecasting, valuation and investment ratings
We forecast the company's 2024-2026 operating income of 15.009/18.161/21.228 billion yuan, net profit to mother of 1.143/1.408/1.593 billion yuan, respectively, and diluted EPS of 1.2/1.4/1.6 based on current total share capital of 0.984 billion shares.
The PE multiples of the company's current stock price forecast EPS for 2024-2026 are 15/12/11 times, respectively. We selected related companies that fall under the same “industrial gas” wind industry category and have consistent wind expectations as comparable companies. Considering that the company is a leading enterprise in air separation equipment and gas operations, superior products consolidate the foundation of performance, and the expansion of categories and models brings flexibility, and the first coverage gives a “buy” rating.
Risk warning
1) Risk of loss of critical technology and talent. 2) The progress of the company's gas business falls short of expectations; 3) Increased industry competition; 4) The risk of significant gas price fluctuations; 5) The risk that the information based on the study was not updated in a timely manner and did not fully reflect the company's latest situation.