It is a private-oriented silicon steel leader, and the advantages of industrial chain integration are outstanding. The company is a domestic private-oriented silicon steel leader, ranking third in the country in terms of oriented silicon steel production and number one in private enterprises. Production for the full year of 2023 is 125,900 tons of silicon steel, an increase of 14,700 tons over the previous year, +13.25% over the same period last year, a record high. The transmission and distribution business achieved revenue of 1,353 billion yuan, +38.52% year over year; gross profit margin was 15.32%, +0.49pct year on year. In a fierce market competitive environment where a large amount of domestic-oriented silicon steel production capacity is put into the market and sales prices continue to fall, production and sales of the two major businesses have increased, highlighting the precise strategic positioning and industrial chain synergy advantages of complementarity and dependency between industries.

Transformers continue to prosper, and the acquisition of Yunbian strengthens competitiveness. The company produced 11.325 million kVA of power transformers throughout the year, a year-on-year increase of +32.90%, a record high. The technical improvement project 24q1 of the 110kV and below energy-saving transformer intelligent chemical plant has entered the peak period of equipment delivery and installation. The acquisition of Yunbian Electric was completed in 24, and the voltage level was raised to 500kV, and its competitiveness in the fields of railway traction transmission and high-altitude high-capacity grades was greatly improved. As the “dual carbon” policy, distribution network policy, and new energy efficiency standards (GB 20052-2024) are released one after another, and benefiting from the rapid development of the landscape under the energy transition trend, the rise in electricity consumption caused by the rise of AI computing power, and huge overseas demand for power equipment under the new global grid cycle, the transformer boom is expected to continue.

Increased production capacity for high-grade silicon steels has benefited from rising prices and rising demand for high-grade silicon steels. In April '24, the price of oriented silicon steel rose for the first time since the end of '22. Baosteel Co., Ltd.'s average monthly prices for B30G130 and B23R085 model-oriented silicon steel both rose by 176.62 yuan/ton month-on-month in April '24, and the market for high-grade silicon steel products was tight, and demand gradually increased. As of April '24, the company's 80,000-ton high-end magnetic new material project has entered the full commissioning stage. The first batch of finished silicon steel-oriented products is about to be rolled off the line, which can clearly benefit from rising prices and increasing demand for high-grade silicon steel.

The company invested 170 million yuan in R&D in 23 years, +70% over the same period, achieving stable production of 0.20mm, 0.23mm and 0.27mm thickness products, breaking through the technical bottleneck of the 23QH080 brand. High-end products represented by the 23QH085/23QH090 brand have been successfully developed and sold one after another. With the structural changes and upgrading of product brands, market competitiveness is expected to be further enhanced.

Investment advice: The company is the only domestic transformer manufacturer that opens up upstream raw materials to downstream services. It has benefited from energy transformation and global power grid construction entering a new cycle. The increase in the share of high-grade silicon steel has brought about improved performance flexibility. As the transformer intelligent chemical plant technology reform project progresses and Yunbian acquisitions are completed, its overall competitiveness has improved. We are optimistic about the company's future development prospects. We predict that the company's net profit for 2024-26 will be 3.09, 4.59, and 612 million yuan, respectively, corresponding to EPS of 0.93, 1.38, and 1.84 yuan, and PE of 19.7, 13.3, and 9.9 times, maintaining a “buy-A” rating.

Risk warning: 1. New product development falls short of expectations; 2. Significant fluctuations in raw material prices; 3. Risk of exchange rate changes; 4. Other force majeure factors.