Net profit gradually recovered. Shanghai Electric released financial reports for 2023 and 2024Q1. In terms of revenue structure, the company achieved revenue of 114.8 billion yuan, down 2.4% year on year, and realized net profit of 0.285 billion yuan, up 108% year on year; 2024Q1 achieved revenue of 20.59 billion yuan, down 3.3% year on year, and net profit to mother 32.01 million yuan, down 91.27% year on year; judging from the revenue structure, the energy equipment sector accounted for 33.93% of revenue in 2023, a year-on-year increase 7.4pct; the renewable energy equipment sector accounted for 51.1% of revenue, an increase of 3.4 pct; the engineering equipment sector accounted for 35.2%, an increase of 0.7 pct; the system integration service sector accounted for 18.6% of revenue, a year-on-year decrease of 4.1 pct, and the company's performance in 2023 was significantly restored.

The gross margin increased steadily, and the comprehensive gross margin of 2024Q1 reached 18.9%. The comprehensive gross margin in 2023 was 18.9%, up 2.64 pct from the same period last year, of which the gross margin of the energy equipment sector was 19.66%, an increase of 1.61 pct year on year, mainly benefiting from the high boom in thermal power; the gross margin of the industrial spare sector was 16.76%, up 1.18 pct from the same period last year; the gross margin of the integrated services sector was 13.65%, an increase of 5.29 pcts year on year. With the gradual delivery of thermal power equipment, the company's comprehensive gross margin is expected 2024Q1 Further improvement.

The increase in orders exceeded revenue, and the growth rate of orders for thermal power and nuclear power was impressive. In 2023, the company added 137.21 billion yuan in orders, up 3% year on year, exceeding the revenue growth rate. Among them, energy equipment orders were 75.22 billion yuan, up 10% year on year, benefiting from the acceleration of thermal power and nuclear power installations. Among energy equipment orders, the growth rates of new orders for nuclear power and coal-fired power generation equipment reached 52.6% and 84.2% respectively. New orders for wind power equipment in 2023 were only 6.94 billion yuan, a year-on-year decrease of 60.8%, mainly due to the increase in wind power concentration, leading companies received more orders Centralized, the growth rate of new orders in the industrial equipment sector was 0.5%, and the growth rate of new orders in the integrated service sector was -13.7%. Overall, orders for thermal power equipment and nuclear power equipment were the main driving force for the company's revenue.

Asset impairment and credit impairment have been reduced. The company's inventory and accounts receivable are large, which has had a large impact on the company's profits. The growth rate of the company's accounts receivable and notes receivable was -0.1% in 2023, and the growth rate declined. The inventory growth rate in 2023 was 5%, mainly due to rapid order growth and the company's inventory increased. Overall, we expect the company's impairment to decline in the next few years.

Profit forecast and investment suggestions: Based on the company's order situation in 2023, we expect the company's revenue for 2024-2026 to be 119.27/124.2/127.45 billion yuan respectively (the original 2024-25 forecast was 139.3 and 148.2 billion yuan), and the corresponding net profit to mother is 0.612/1.107/1.624 billion yuan (the original 2024-25 forecast was 2.78 and 3.94 billion yuan), according to the DCF model , we lowered our target price from HK$2.37 per share to HK$2.02 per share, maintaining the “better than market” rating.

Risk warning: 1. Relevant policies fall short of expectations; 2. Gross margin dropped sharply due to fierce market competition; 3. Prices of raw materials rose sharply; 4. Exchange rate risk.