HANGYANG(002430)：GLOBAL ASU LEADER ASPIRING TO GROW INDUSTRIAL GAS BUSINESS

　　Core views:
　　Hangzhou Oxygen Plant Group Co., Ltd. (Hangyang), a world-leading supplier of air separation units (ASU), is going strong to grow the industrial gas business. The Company saw its operating revenue growing from Rmb6.45bn in 2017 to Rmb11.88bn in 2021 (CAGR +16.5%), and ANP after deduction of non-occurring profit or loss up from Rmb0.3bn to Rmb1.15bn (CAGR +39.9%) during the same period. Hangyang gets more competitive in the ASU market being consolidated, and steady development of the industrial gas business may broaden the boundaries for Hangyang. We are keen on the prospect of Hangyang and initiate coverage with a "BUY" rating.
　　Abstract:
　　ASU leader expanding into the industrial gas business. In 1995, Hangzhou Oxygen Concentrator Group Company was formally established, marking the corporatization of the brand. In 2003, Hangzhou Hangyang Jiande Gas Co., Ltd. was established and the gas business started to boom. In 2010, Hangyang shares were officially listed on the Shenzhen Stock Exchange. Hangyang is the world’s biggest manufacturer and marketer of large and extra-large ASUs, and its gas business are among the top domestically. The 2021 operating revenue from gas sales and ASU stood at Rmb6.62bn (+22.1% YoY) and Rmb4.31bn (+5.5% YoY), accounting for 55.7% and 36.3% of the Company’s total, respectively. Strong momentum remained in 1-3Q2022, with operating revenue and ANP standing at Rmb9.77bn (+9.0% YoY) and Rmb1.27bn (+20.9% YoY).
　　Intensive efforts secure success in the fast-growing industrial gases market (1) Industry overview: Dubbed as the blood of the industry, industrial gases connect upstream raw materials and equipment and downstream industries including steel, petrochemicals, and electronic products. Demand for industrial gases is huge from traditional industries, while emerging industries like electronics and renewable energy require high-purity industrial gases. (2) Market size: According to Frost & Sullivan (as cited in AirPower Technologies Prospectus, same below), the global industrial gas market increased from US$97.8bn in 2015 to US$134.8bn in 2020 (CAGR of c. 6.6%), and the size is expected to grow to US$175.5bn in 2025 at a CAGR of c. 5.4%. The third-party outsourcing mode thrives in China, which valued Rmb87.2bn in 2020, up from Rmb50.3bn in 2015 (CAGR of c.11.6%), and Frost & Sullivan forecasts the size to hit Rmb147.5bn in 2025 at a CAGR of 11.1%, higher than the industry average growth. (3) Competitive landscape: Most international giants have transformed from equipment manufacturers into gas operators. Frost & Sullivan indicates that in 2020, the CR5 (Linde, Air Liquide, Air Products, Nippon Sanso, and Yingde) occupied c. 45.8% of the global industrial gas market. Concentration is high in China’s industrial gas outsourcing market. Among c. 1,000 independent industrial gas suppliers at home, the CR5 was c. 67%, of which Yingde and Hangyang accounted for 22.3% and 6.2%, respectively.(4) Bulk gases: Frost & Sullivan statistics show that on-site gas production took a substantial share of 65.5% in 2020. It can secure stable cash flow and improve profits after the depreciation period; the gas retail business is more volatile, but its price and gross margin are higher. Qiaoyuan Gas stated in its prospectus that the pipeline oxygen price was c. 60% of the retail oxygen price, and the ratio was c. 30% for nitrogen. (5) Specialty gases: According to Yidu Data, the domestic specialty gas market is expected to value Rmb40.9bn in 2022 and keep expanding quickly. Electronic specialty gases take a big part of the market. According to Forward Industry Research Institute (as cited in Jinhong Gas Prospectus), the four overseas giants occupied 88% of the domestic electronic specialty gases market in 2018. There is a vast space for domestic players to replace imported gases.
　　The gas business is blossoming thanks to the lead in large ASU. (1) Equipment: According to the "Gas Separation Equipment Industry Statistical Yearbook" prepared by the Gas Separation Equipment Branch of China General Machinery Industry Association (CGMA), Hangyang ranked first with a share of 33.0%, 35.7%, and 43.2% by oxygen production in 2018/19/20, and the share was on the rise. The Company’s website indicates that over 4,000 complete sets of ASUs have been provided, making Hangyang the world’s No.1 in both output and sales volume. Hangyang has a big lead in large and extra-large ASUs. In 2018-2019, only four domestic players manufactured ASU with an oxygen capacity of 60k Nm3/h or above, and Hangyang was the only one pushing the capacity over 100k Nm3/h. (2) Gas business: The Company has a considerable industrial gas business. As of the end of 3Q2022, ASUs in operation have an oxygen capacity of c.1.67mn Nm3/h. As of 1Q2022, 19 industrial gas projects are underway and proposed, and the investment totals Rmb6,213mn. As shown in the Company's investor relations activity log, the Company has added an oxygen capacity of c. 0.64mn Nm3/h in 2021, which is roughly half of China’s new pipeline gas projects by oxygen capacity of the year. The retail business has been optimized too, which contributed to c. 27% of the 1H2022 gas revenue. By the end of 3Q2022, end users accounted for more than 40% of the retail sales volume.
　　Potential risks: Macroeconomic fluctuations; disappointing gas business development; increased industry competition; big swings in bulk raw material prices; loss of KAs; policy changes in downstream industries; resurfacing pandemic beyond expectation; problems in the Company's internal control and management.
　　Earnings forecast, valuation and rating: Leveraging its manufacturing superiority as a global ASU leader, Hangyang is expanding into the downstream industrial gas market. The Company has a considerable industrial gas business and contributes to nearly half of the new gas capacity at home. We expect the Company's 2022E/23E/24E ANP to be Rmb1.57bn/1.87bn/2.31bn. Both PE and PB were used for the valuation, and comparable companies include Shaangu Power (601369.SH), a leading turbomachinery manufacturer serving similar downstream players, and Jinhong Gas (688106.SH), Huate Gas (688268.SH), and Kaimeite Gases (002549.SZ) engaged in industrial gas business. With the average 41x 2022E PE of comparable companies (20.8x for Shaangu Power, 40.2x for Jinhong Gas, 45.5x for Huate Gas, and 58.3x for Kaimeite Gases, per Wind consensus forecast) as a reference, and considering the 55.7% share of the industrial gas business in the Company’s 2021 operating revenue and the strong cyclical performance of the equipment business, we assign 30x 2022E PE to deliver a target price of Rmb48. Under the PB valuation model, considering the 2022E PB of comparable companies (2.6x for Shaangu Power, 3.6x for Jinhong Gas, 6.4x for Huate Gas, and 10.1x for Kaimeite Gases, per Wind consensus forecast) and the Company’s 4.5x PB based on the current market value, we assign 5.1x 2022E PB to deliver a target price of Rmb48. Based on both PE and PB results, we assign a target price of Rmb48 and initiate coverage with a "BUY" 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。