HENGRUN HEAVY INDUSTRIES(603985)INITIATION：WIND TOWER FLANGE LEADER BECOMES A NEW FORCE IN BEARINGS AND GEARBOXES

Hengrun Heavy Industries is the leading wind power tower cylinder flange manufacturer with 20 years’ experience in the forging industry. We expect it to fully benefit from the trend of wind power turbine upscaling with a gradual market share expansion. Besides, the Company has been expanding the wind power bearing and gearbox forging businesses to launch the second earnings growth curve. We forecast its 2022E-2024E EPS to be Rmb0.27/1.06/1.70 and assign a target price of Rmb31 on 29x 2023E PE. We initiate coverage with an “OVERWEIGHT” rating.
As a wind power flange leader, Hengrun has been building a presence in the new areas of bearings and gears.
Hengrun is mainly engaged in the R&D, production and sales of ring forgings, forged flanges and other free forgings, as well as vacuum chambers and other parallel parts. At present, the Company is one of the few makers in the world that can manufacture 7.0MW and above offshore wind power tower cylinder flanges. Among them, 9MW products have been put into mass production with a sector-leading advantage. The Company’s wind power tower cylinder, as its key product, has contributed more than 70% of the total revenue and has become a core revenue growth booster. Meanwhile, Hengrun has been rapidly developing new products such as wind turbine bearings and gearboxes to make space for secular earnings growth.
The growth of wind power is strengthened, and the demand for forging products is on the rise.
As the growth of wind power installations will likely accelerate in 2023, we estimate wind power installations at about 80GW in 2023 with offshore wind power installations doubling to above 10GW. Besides, offshore wind power installations will likely post a high CAGR of c.40% over 2023-25. With the strengthening of wind power growth, we expect the market size of domestic/global wind tower cylinder flanges to reach Rmb5.7bn/9.2bn in 2025, implying a 2022-2025 CAGR of 29%/19%. The market size of domestic wind power bearings will likely rise to Rmb22.8bn in 2025, corresponding to a CAGR of more than 40% over 2022-25. Considering the upgrading towards large megawatts and the accelerated import substitution of wind power bearings, we expect domestic wind power bearing manufacturers to embrace an opportunity for accelerated growth. Besides, benefiting from the rising penetration of double-fed and semi-direct turbine models, we expect accelerated demand rise for wind power gearboxes and forecast the consumption volume of domestic gearbox forgings to reach about 400kt in 2025, corresponding to a CAGR of about 27% over 2022-25.
Flange forging leader benefits from the rise in both shipment and profit.
As one of the rare players that have mastered both forging and deep processing technologies in China, Hengrun has received qualification approval and customer recognition both at home and abroad. We expect its production and shipment, as well as market share, to rise further driven by rising wind power installations and the continuous capacity ramp-up. We expect its profit to remain relatively stable in 2023 thanks to the sharp drop in
the prices of raw materials such as carbon steel in 2H22, which may ease the 2023 cost pressures greatly YoY. Meanwhile, considering the likely price stabilization of flange products due to the likely significant demand recovery for wind power installations in 2023, coupled with the promotion of product structural upgrades, we expect the flange profit level to rebound by a large margin based on the low bases in 2022.
Expand the new businesses of bearings and gearboxes to refuel growth.
Based on the technical experience and industrial resources of large-scale forgings, Hengrun strengthens its presence in bearings and gearbox forgings through fundraising projects via IPO proceeds, alongside an active efforts in improving relevant parallel parts and the talent pool, to expand new customer base such as Envision Energy rapidly and reinforce long-term cooperation. At this point, the Company has realized the mass production and shipment of three-row-roller independently-variable paddle bearings, and the test of main bearing samples is going smoothly, which is likely to kick off mass production gradually in 2H23. Hengrun's deep processing capacity of gears has been put under construction and is well-poised to start trial production for higher capacity in 2Q23 and enter the stage of mass production in 2024, indicating vast headroom for secular growth.
Potential risks: Wind power installations missing expectations; large fluctuations in raw material prices; a sustained drop in wind power part prices; intensified market competition; new product verification and expansion failing expectations; disappointing commissioning of incremental production capacity.
Investment recommendation: As the leader in wind power tower cylinder flanges, Hengrun is well-poised to post gradual market share expansion, benefiting from the trend of wind power turbine upscaling. Meanwhile, the Company has been actively expanding its wind power bearing and gearbox forging businesses to refuel its growth. We estimate its 2022E-24E ANP to be Rmb117mn/469mn/751mn, equivalent to EPS forecasts of Rmb0.27/1.06/1.70 on 102x/26x/16x PE based on the current price. Combining PE relative valuation method and DCF absolute valuation method, we assign 29x 2023E PE to derive a target price of Rmb31 and initiate coverage with an "OVERWEIGHT" rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。