Description of the event
The company released its quarterly report for 2014. In 24Q1, it achieved revenue of 2,648 million yuan, up 13.16% year on year, up 1.5% month on month; net profit to mother of 321 million, up 18.8% year on year, up 6.75% month on month; net profit after deducting non-return to mother was 288 million, up 7.29% year on year, up 9.19% month on month.
Incident comments
The company's 24Q1 revenue grew steadily, and short-term fluctuations in gross margin may be due to depreciation pressure brought about by the consolidation of large forging assets. The rise in large forging production capacity is expected to lead to an increase in profitability. The downstream users of the company's products are mainly aviation and aviation engine manufacturers, and the horizontal expansion of the company's Hongshan Forging into a large forging business is expected to further consolidate long-term growth. 24Q1 gross sales margin was 29.76%, -1.98pcts year-on-year, and +4.93pcts month-on-month. According to our analysis, the company's fixed assets reached 4.653 billion yuan at the end of 24Q1, an increase of 2,236 billion yuan over the previous year in 23Q1. At the same time, Hongshan Forging is in a phase where production capacity is climbing, and the gross margin is low due to high depreciation pressure.
The company's cost ratio effectively controls or reflects an improvement in management level during the period, and maintaining a high level of R&D investment establishes certainty for future long-term growth. The 24Q1 company's expense ratio was 12.56%, a year-on-year decrease of 0.68pcts; the net sales margin was 12.79%, up 0.55pcts year-on-year. Among them, the sales expense ratio was 0.77%, up 0.19 pcts year on year; the management expense ratio was 6.49%, down 0.54 pcts year on year; the R&D cost rate was 4.86%, up 0.02 pcts year on year; and the financial cost ratio was 0.43%, down 0.34 pcts year on year. The company acquired Hongshan Forging into a large-scale die forging business to optimize the product structure layout. Currently, it is in the construction investment and product verification stage. Investments such as new product development at this stage are expected to seize long-term development opportunities for the industry.
Contract liabilities have been phased out but remain high, or reflect smooth downstream deliveries awaiting the release of a new round of demand. The inventory balance at the end of 24Q1 was $3,577 million, up 2.82% year on year; the balance of advance payments was $127 million, down 27.21%; the balance of projects under construction was $792 million, up 6.2% year on year; the fixed asset balance was $4.653 billion, up 92.5% year on year; and contract debt balance was $490 million, down 31.29% year on year.
Profit forecast and valuation: The company is expected to achieve net profit of 1,567/19.14/23.38 billion yuan in 2024-2026, with year-on-year growth rates of 18%, 22%, and 22%, corresponding PE 19/15/13X, respectively.
Risk warning
1. The company's forging business faces market-based competition, and the impact on market share and profitability is uncertain; 2. The company has entered the large-scale die forging business, and there is uncertainty about the impact of the project progress and subsequent operations on the company.