Event: the company recently released its semi-annual report for 2023, with operating income of 720 million yuan in the first half of the year, + 25.0% of the same period last year, and net profit of 50 million yuan, + 79.5% of the same period last year. In the second quarter alone, the company achieved an operating income of 410 million yuan (+ 33.0%) and a net profit of 30 million yuan (+ 101.1%). The company plans to buy 51% of Jiangsu Ruimei Auto parts Co., Ltd. with 280 million yuan in cash.

Acquire 51% stake in Jiangsu Ruimei and lay out the second growth curve of auto parts. The target company is mainly engaged in new energy automobile electric drive part aluminum alloy lightweight integrated molding parts products, in the automotive field, the main customer is BYD, other customers are BAIC Group, Guangzhou Automobile Group, China FAW, SAIC and so on. The 22-year revenue is 377 million yuan and the net profit is 28.78 million yuan. The counterparty promises that the 23 -, 24-and 25-year non-return net profit of the underlying company will not be less than 47.27 million yuan, 57.82 million yuan and 68.55 million yuan respectively.

Profitability improved quarter by quarter, with 23H1 stainless steel accounting for 45 per cent of gross margin. 23Q2 has a gross profit margin of 15.2%, a month-on-month increase of 0.2PCT, a month-on-month increase of 1.0PCT, and a month-on-month increase of 1.0PCT. With the further release of production capacity of subsequent fundraising projects, profitability is expected to be further enhanced in the second half of the year.

23H1 China's coal power approved to start the boom, driving the boiler tube demand boom. By the end of June 2023, the installed capacity of coal power in China was 1.14 billion kilowatts, an increase of 2.7 percent over 1.11 billion kilowatts in the same period last year. China's new approved coal power capacity was nearly 60GW, and the new start-up capacity exceeded 30GW, which was significantly higher than that of 25GW and 25GW in the same period in 22 years, leading to a booming demand for raw material boiler tubes in the upper reaches of the power plant.

The production line of the fund-raising project has been officially put into production, and the sales of stainless steel have doubled compared with the same period last year. The company's fund-raising project was officially put into production at the end of May 2023, with a benefit of 1.06 million yuan by the end of June 23. Thanks to the release of new capacity, sales of stainless steel products increased by 102% compared with the same period last year. By the end of June 23, the company's S30432 products had completed orders of 20,000 tons, accounting for nearly 60% of the market share of domestic S30432 small diameter tubes.

Considering the adjustment of the production line of the company's old stainless steel factory, we downgrade the company's stainless steel sales assumption and predict that the company's earnings per share in 23-25 years are 1.81,3.01,3.07 yuan respectively (the original 2.39,3.92,4.01 yuan). Using DCF valuation, the company is given a price of 42.74 yuan to maintain the buying rating.

Risk hint

The business growth rate of alloy steel and stainless steel is lower than expected, the risk of sharp fluctuations in raw material prices, the risk of the concentration of sales customers, the slowdown of macroeconomic growth, the risk that the prosperity of the coal power market is not as good as expected, and the risk that the acquisition progress is not as expected.