Key points of investment

Incident: The company released its 2022 annual report and the first quarter report of 2023. In 2022, the company achieved total revenue of 74.00 billion yuan, +16.65% year on year, and net profit of the mother was 1,208 billion yuan, +9.13% year on year. Net profit returned to the mother in 202Q4 was 275 million yuan, +48.9% year on year and -2.4% month on month. 2023Q1 achieved revenue of 19.473 billion yuan, +4.8% year on year and +17.7% month on month; net profit of the mother was 333 million yuan, +6.6% year on year and +21.1% month on month.

In 2022, the industry took the initiative to adjust the structure and seek strategies, and the industry bucked the trend and achieved positive growth. Under the impact of the international macroenvironment and international public health events in 2022, the overall prosperity of the copper processing industry was weak, and the comprehensive domestic production of processed copper materials was 2025 million tons (yoy +1.8%). In the face of weak industry sentiment, the company is active, actively optimizing the market and customer structure, actively improving its advantageous position on the supply side, abandoning some low-value orders, and at the same time fully developing overseas markets, achieving a 13% year-on-year increase in export sales. The gross profit of overseas copper sales has reached 53.5%, driving a continuous increase in overall profitability. According to operating data, the company sold 864,500 tons of processed copper materials in 2022 (yoy -5.38%), and Guimu's net profit increased +9.13% year on year.

Among them, the gross profit of copper-processed materials was 3,589 yuan per ton, +964 yuan over the previous year, the net profit per ton was 1,391 yuan, the year-on-year +180 yuan, and the cost per ton period was 1,790 yuan, +95 yuan over the previous year. On a quarterly basis, we estimate that the company sold 190,000 tons of Q4 copper-processed materials, -8% over the previous month, and the profit per ton was about 1,429 yuan, +130 yuan over the previous month. The company's customer and market structure optimization continued to be optimized, and overseas market development results were continuously unleashed.

Industry demand rose marginally, and the 23Q1 performance was impressive. Due to the impact of the post-epidemic and Spring Festival in the first quarter, the operating rate of the copper pipe industry was low in January, gradually rebounded in February, and demand continued to rise in March. According to SMM data, the monthly operating rate of domestic copper pipes reached 90.29% in March, +21.96pct month-on-month and +4.42pct year-on-year, and the marginal demand in the industry continued to rise. The company's 23Q1 accounts receivable +30% month-on-month, mainly due to the month-on-month increase in sales volume.

According to our estimates, the company's net profit per ton in 23Q1 may be 1,642 yuan, +229 yuan over the previous year, +213 yuan over the previous year. We judge that this may be due to the fact that domestic and foreign market demand is better than the same period in previous years, and at the same time, the further release of overseas market development results.

2023 sets a new chapter: the leadership team has been refreshed, and the European and American markets go hand in hand with the accelerated development of the copper foil circuit.

(1) During the reporting period, Mr. Cao Jianguo was elected as the company's chairman, appointed Mr. Feng Luming as the company's general manager, Mr. Wu Changming as the company's deputy general manager, and Mr. Zhu Zhangquan as the chairman of the company's supervisory board. Feng Luming is the son of the actual controller of Hailiang Group. After this leadership team adjustment, the company is expected to take control of the group's leadership team, and the new leader is expected to lead the company to achieve the collapse of overseas markets, in-depth development of European and American markets, and the strategic goal of accelerating the global layout of the copper foil business. (2) According to the company's announcement, in addition to consolidating its position in the domestic market, in addition to consolidating its position in the domestic market, the US copper pipe project has been put into operation. Currently, the US production base already has a production capacity of 30,000 tons. The second phase of 30,000 tons is expected to be completed by the end of 2023, with a production capacity of 60,000 tons of copper pipes at that time; in the European market, the company will accelerate HME technology improvement projects to further consolidate and improve production efficiency, increase market development, and increase profitability. (3) The volume of copper foil orders is imminent, pointing to the global layout. At present, the company has passed factory audits from customers such as Honeycomb Energy and Vision Power, and has entered the mass production stage. Other leading power and energy storage battery companies are expected to supply them one after another in the second quarter of 2023. Indonesia's 100,000 ton lithium battery copper foil project. Currently, the first phase of 50,000 tons is expected to be completed in 2023-2025, and the second phase is expected to be completed in 2025-2027. The project will be an important part of the company's copper foil business moving towards the global strategic layout. As future projects are completed and put into operation, it is expected that they will use the company's international operating advantages to achieve differentiated competition, rapidly expand the international market, and continue to strengthen the second curve of the company's growth.

Profit forecast and investment advice: As a global copper pipe leader, the company is actively exploring the European and American markets while consolidating its dominant position in the country, and the profitability of its main business is expected to increase significantly. Furthermore, the copper foil business is about to be launched on a large scale, anchoring the global layout strategy in the long term, and a second growth curve in performance can be expected. We expect net profit attributable to the mother in 2023-2025 to be 1,63/23.98/3.656 billion yuan respectively, the corresponding EPS is 0.82/1.21/1.84 yuan respectively, and the PE corresponding to the stock price on April 28, 2023 is 14.8/10.1/6.6 times, respectively. Maintain an “increase in holdings” rating.

Risk warning: downstream demand for copper tubes is slowing down, the release of copper foil projects is slow, processing costs are falling, etc.