Description of the event

2024Q1-Q3 achieved revenue of 10.35 billion yuan, +5.85% year over year, and realized net profit of 0.675 billion yuan, or -20.68% year over year.

Among them, Q3 achieved revenue of 3.625 billion yuan, +8.66% year-on-year, and realized net profit of 0.238 billion yuan, or -26.99% year-on-year.

Incident comments

The year-on-year decline in gross margin affected profits, and expense ratios were well controlled. The 2024Q3 company's gross profit margin was 19.85%, -4.55 pcts year on year, and -1.64 pcts month-on-month, which was the main factor affecting the net profit margin. In addition to gross margin, financial expenses (cost ratio increased by 0.69 pct), other income, investment income, etc. had a slight adverse impact on profits. However, thanks to the company's strengthened cost control, especially those related to personnel management, management expenses were well controlled, and the Q3 management expense ratio decreased by 2.80 pcts year on year.

The company's net profit margin fell 2.85 pcts year over year, and the decline was less than the gross profit margin.

Gas prices have now recovered marginally and are expected to gradually break out of their trough. Liquid oxygen/ liquid nitrogen/ liquid argon rose 3%/2.4%/3.85% respectively in October. Gas prices are still bottoming out, but the trend is improving month-on-month. As of October 24, the average price in the liquid oxygen/liquid nitrogen/liquid argon market rose 2.05%/2.4%/4.08% month on month; the average price of liquid oxygen/liquid nitrogen/liquid argon rose 4.56%/3%/5.42% month-on-month in the previous week. Among them, procurement from many steel mills supports liquid oxygen demand; maintenance and downstream procurement by major local enterprises such as Northeast China and East China support liquid nitrogen demand, and local stainless steel demand continues to increase, which supports the liquid argon market.

New construction projects are fully stocked, and large-scale vacancy projects continue to be implemented. Tengzhou Hangxi, a subsidiary of 2024Q3, increased its capital. Tengzhou Hangshi is responsible for investing in the construction of a 76,700 nm/h air separation unit to provide Lianhong Chemical with the required industrial gases and services.

2024Q1-Q3 has signed a new building+acquisition project with an output of 367,500 nm/h, which has exceeded the full year of 2023. The full project reserves are expected to support the steady growth of the company's gas revenue. Among the projects implemented in 2024, the largest was the construction of an 80,000 nm/h air separation unit in Jincheng, Shanxi, and the company continued to expand in the field of large-scale air separation equipment.

Contract liabilities increased month-on-month, indicating that on-hand orders were good. As of the end of 2024Q3, the company's contract debt was 3.21 billion yuan. Compared with 2.94 billion yuan at the end of 2024Q2, the 3.17 billion yuan at the end of 2023Q3 all increased month-on-month, indicating that the company maintained a good level of orders in hand. New orders for gas and equipment are mainly in the chemical industry; additional production capacity involves coal chemicals, chemical fertilizers, etc.; and steel equipment is mainly based on technological transformation projects.

Continue to expand overseas markets. The company recently established an overseas BU, integrated the resources of equipment exports and overseas gas investment teams, continuously accelerated the improvement of international management capabilities, and strengthened overseas market development efforts by establishing specialized foreign trade teams. Subsequent overseas market expansion will become the company's key direction. The foreign trade volume of 2024H1's air separation equipment has exceeded the total volume for 23 years, and has signed orders such as 64,000 nm/h for India and 50,000 nm/h for Mexico.

Net profit of 1.008/1.305/1.553 billion yuan is expected to be achieved in 2024-2026, corresponding to 26/20/17 times PE, giving it a “buy” rating.

Risk warning

1. The risk of increased competition in the industry;

2. The risk of poor gas price performance.