Zhongchen is deeply involved in the inverter industry, and the main downstream is air compressors. Product advantages are that miniaturization is superior to peers, and profit margins are industry-leading. We believe that the company is expected to achieve high performance growth in 2024 and 2025. Growth lies in expanding downstream, expanding categories, and expanding production capacity.
The product is more cost-effective than its peers, and maintains a high profit margin
Zhongchen products have significant advantages in miniaturization, and are far smaller than their peers under similar performance. Take the 22KW general-purpose inverter as an example. Zhongchen's product is 41% smaller in size than Huichuan, 67% smaller than INVITON, and 17% smaller than Sine. Through software algorithms and structural optimization, the company can save raw materials and save installation space for customers.
In 2022, the gross margins of Huichuan, Aviten, Blue Ocean, and Sine Electric inverter-related products were 45.6%, 39.7%, 39.3%, 41.1%, and 32.2%, respectively. Zhongchen's 2022 inverter product gross profit margin was 41.7%, which was only lower than Huichuan, and higher than that of companies such as Avion and Blue Ocean Huateng. We believe that the company has significant advantages in product miniaturization, management efficiency, and level of automation, and is focused on the field of air compressors.
Growth Highlights: Expanding Downstream, Expanding Categories & Expanding Production Capacity
Industry expansion: Against the 80% penetration rate of European, American and Japanese screw air compressors, domestic screw air compressors accounted for only 31% in 2019. Screw air compressors are equipped with inverters, and air compressor inverters are expected to surpass the growth rate of the air compressor industry to achieve high growth. In addition to air compressors, Zhongchen products have covered construction machinery, water supply equipment, chemical machinery, machine tool and other fields, and are expected to continue to develop in new fields.
New products: 1) Servo: Launch of the US880 high-performance servo product for the middle and high-end markets; 2) Wind power propeller: launch of an integrated wind power propeller controller for accurate simultaneous control of onshore and offshore high-power wind turbine blades; 3) Integrated programmable display control controller for injection molding machines: improve the product line and provide customers with solutions. 4) Frequency converter: The product realizes the bus function, and the range of adaptation is constantly expanding.
Capacity expansion & overseas development: In December 2023, the new plants in the Shanghai and Anhui Wuhu projects are already in the inspection stage, and production capacity is expected to be released one after another in early 2024. On the overseas side, the company currently mainly cooperates with international customers through ODM/OEM, and the main regions are Russia, etc.
Profit forecasting and valuation
We expect the company's revenue in 2023-2025 to be $6.3, 8.8, and 1.17 billion yuan, up 18%, 38%, and 33%; net profit to mother of 2.0, 270, and 360 million yuan, up 31%, 35%. Compared with industrial control companies in the same industry, Huichuan, Weichuang, and Hechuan Wind all agree that PE will be 25, 25, and 39X respectively, and will be given a 2024 PE 28X, corresponding to a stock price of 50.7 yuan. For the first time, it was covered and given a “buy” rating.
Risk warning: demand for air compressors falls short of expectations, competitiveness of new products falls short of expectations, sharp rise in raw material costs, sluggish overall manufacturing, high risk of stock prices or fluctuations, etc.