Key investment points

Thirty years of deep cultivation, the leading casting industry has taken the lead: The company was founded in 1992 and has been committed to the production, development and sales of large-scale heavy equipment castings for 30 years. The A-share market was launched in 2016. Currently, it has formed two major series of products: wind power castings and injection molding machine castings in the fields of new energy and general machinery, and has been planted in the field of nuclear power equipment and alloy steel through thick section technology of ductile iron. Benefiting from the wind power industry's rapid procurement and stable raw material prices, the company's revenue and profit have grown rapidly since 2019. The wind power casting business accounted for 87% of revenue in 2020, an increase of 23 pcts over 2017. After 2021, along with the end of the wind power industry and the affordability of wind power projects, the competitive pattern deteriorated after the casting industry continued to expand production. The company's revenue did not change much from 2020 to 2023, mainly affected by the decline in unit prices.

Industry competition intensified and revenue growth slowed: the company's 24Q1-3 revenue was 3.18 billion yuan, -9.8%; net profit to mother was 0.51 billion yuan, same 43.5%; gross profit margin 17.2%, same -2.3 pct, net profit margin 15.9%, same 5.9pct; of these, 24Q3 revenue was 1.4 billion yuan, 23.2%/28.1%, net profit to mother 0.09 billion yuan, 38% /74.6% year-on-month, gross profit margin 14.8% -0.3/-2.7pct, net profit margin 6.1% month-on-month, 0.7/-24.6pct month-on-month.

Production capacity for large castings was scarce. At the beginning of '25, there was a basis for price increases: the casting industry expanded drastically in '23, and unit prices declined rapidly: 1) Production expansion: the foundry industry was included in the “top two industries” in '23; in '23, all provinces released capacity restrictions, and the foundry industry expanded drastically; 2) Price: Since '21 years of affordable prices, the unit price of the casting industry has continued to decline, and the price reductions reached +5% and 10% respectively in mid-'23 and '24. Taking Sun Moon Co., Ltd. as an example, the unit price of 22-24H1 was 10,829, 10,533, and 9510 yuan/ton; affected by this, the company's net profit per ton continued to decline, and 22-24H1 was 589, 961, and 720 yuan/ton, respectively. The penetration rate of large 8~10MW Lufeng models is expected to increase from 15% in '24 to 35% in '25. Starting at 24H2, there is already a shortage of finishing capacity, and there has been a slight increase in prices in the large casting process. It is expected that medium and large castings that were negotiated at the beginning of '25 are still in short supply, and there is a basis for price increases, and the casting industry is expected to gain steady growth in performance.

Profit forecast and investment rating: Considering the investment income contributed to the company's 24-year wind farm transfer, we raised the 24-year net profit to 0.661 billion yuan (original value was 0.637 billion yuan); considering the rolling development and rolling transfer of the company's wind farm, which can contribute a certain amount of investment income in the next 2 to 3 years, and the shortage of large-scale wind power castings, profitability has reached an inflection point. We raised 25-26 net profit to the mother to 0.825/0.935 billion yuan (original value was 0.773/0.886) billion yuan), +37%/25%/13% year over year in 24-26, corresponding PE was 19.3/15.5/13.6X, maintaining a “buy” rating.

Risk warning: increased competition, risk of changes in industry policies, risk of declining profits in the power plant business, etc.