Description of the event

The company published its annual report and quarterly report, achieving revenue of 2,697 million yuan in '22, -8.41% year on year; net profit of returned mother was 414 million yuan, -10.42% year on year, after deducting net profit of 374 million from non-return mother, minus net profit of 374 million, -11.76% year on year. 23Q1 achieved revenue of 626 million, +2.62% year on year; net profit of returned mother was 80 million yuan, +24.25% year on year; after deducting net profit of non-return mother was 71 million yuan, +21.16% year on year.

Incident comments

The Q1 revenue growth rate was corrected, and the increase in gross profit helped show performance elasticity. The overall boom in GM's manufacturing industry was relatively sluggish in '22, causing the company's revenue growth rate to decline to varying degrees in each quarter. However, there are many highlights of the company's operations: 1) The unit price of each business increased year-on-year. In particular, the average price of a single GNORD high-end speed reducer was +21.4% compared to the same period last year. 2) The resilience of modular speed reducers is obvious, and delivery volume has declined only slightly, driving the overall gear reducer business revenue to -5.76% year on year, which is the best performance among all business segments. At the same time, the industrial gearbox business benefited from the promotion of new products and import substitution, and sales bucked the trend. 3) Shipments to major customers in the lithium battery industry increased sharply year-on-year, and breakthroughs were achieved in offshore engineering (ship ancillary equipment reducers), photovoltaics (photovoltaic tracking bracket rotary speed reducers” and project-based businesses. At the same time, benefiting from the gradual improvement in manufacturing demand, the Q1 company's revenue growth rate turned to an inflection point. The year-on-year increase in gross margin helped the performance increase by 24% better than expected.

Profitability was stable during periods of declining demand, and the ability to control costs and reduce fees was continuously enhanced. The company's gross margin fell 0.38 pct year-on-year in 2022, mainly due to high raw material prices and declining demand. However, through stabilizing prices, improving the sales structure, and strict efficiency and cost reduction measures, the company's gross margin and net profit margin were generally stable. Looking at product segments, gross margins of cycloid reducers (+1.89pct year on year) and GNORD reducers (+1.94pct year on year) improved year-on-year. At the same time, the cost side has also been optimized. The expense ratio during the sales period was -0.09pct compared to the previous year. Among them, the sales expense ratio and management expense ratio were -0.38pct.-0.01 pct.q1, the gross margin of the company was +1.96 pct year-on-year, and the net interest rate was +2.19pct year-on-year, mainly benefiting from falling raw material prices and improved cost side performance.

GM's leading position on the racetrack is stable, and its advantages are obvious. Expanding the variety and application continues to open up room for growth. 1) Accelerate overseas expansion. At present, the company has achieved cooperation with leading customers in the Southeast Asian palm oil industry, the Middle East rubber and plastic extruder industry, and the Russian grain storage and mine lifting industry, laying a solid foundation for subsequent overseas market development. The gross margin of overseas business is higher, which is expected to provide an increase in demand while also bringing about structural improvements. 2) Improve product performance, expand product coverage, and further enhance market competitiveness. In 2022, the company optimized and upgraded series products such as ZY-C with hard teeth, and developed new products such as ultra-high torque SHE2 series gearboxes and ultra-high speed HHE2 series gears. The photovoltaic sector lays out photovoltaic power plant tracking bracket rotary speed reducers; the wind power sector develops new propeller yaw reducer products; the precision speed reducer business has reached the advanced level of the industry through process improvements, and has successfully completed the development of 10 models of new products. Continued expansion of the business area is expected to expand the number of new volumes. The general speed reducer circuit is cyclical. The company expands the fields of special speed reducers and high-end speed reducers to calm the domestic cycle and create more incremental business highlights.

Maintain a “buy” rating. After Q2, the recovery trend in the manufacturing industry may more clearly drive demand in the speed reducer industry to pick up demand. Combined with the company's stronger ability to control costs and reduce costs and expand the field of special speed reducers and high-end speed reducers to create new growth poles, performance elasticity is expected to be unleashed. Net profit of the mother is expected to be 580 million and 750 million in 2023-2024. The corresponding PE is 22x and 17x respectively.

Risk warning

1. Risk that manufacturing industry repair falls short of expectations;

2. The risk that the development of special speed reducers and high-end speed reducers falls short of expectations.