(Report produced by: CITIC Securities)

The company is a large-scale key enterprise in the national heavy machinery industry and a key enterprise in the manufacture of new energy equipment. The company was established in 1993 and listed on the main board of Shenzhen Stock Exchange in 2008. The company mainly provides complete sets of technical equipment, high-tech products and services for metallurgy, ports, energy, mining, engineering, transportation, aerospace, shipbuilding, environmental protection and other basic industries of the national economy. Several major product structures have been formed, such as metallurgical machinery, lifting machinery, bulk material handling machinery, port machinery, energy machinery, transmission and control systems, marine parts, construction machinery, offshore machinery, etc. The company's equity structure is stable, and the actual controller is the State-owned Assets Supervision and Administration Commission of Dalian Municipal People's Government. As of October 2023, the actual controller of the Company was the State-owned Assets Supervision and Administration Commission of the Dalian Municipal People's Government, holding 62.18 per cent of the Company's equity and 1.10 per cent of the Hong Kong Securities Clearing Company Limited. In 2022, the former chairman Shao Changnan retired, and the new chairman Meng Wei took office. He served as the chairman and party secretary of Wafangdian Bearing Group Co., Ltd., and the party secretary and director of the State-owned Assets Supervision and Administration Commission of Dalian Municipal People's Government.

Dalian Heavy Industries has formed five main business sectors, corresponding to various product categories such as lifting machinery and wind power components. The main business sectors of Dalian Heavy Industry are as follows: 1) Material handling equipment sector: the main products are loading and unloading machinery, lifting machinery, port machinery, etc.; 2) New energy equipment sector: the main products are wind power parts, special cranes for nuclear power plants, etc.; 3) Metallurgical equipment sector: coking machinery, metallurgical vehicles, continuous casting machinery, etc.; 4) Core parts sector: transmission and control systems, marine equipment, etc; 5) Engineering general contracting project plate: environmental protection engineering, metallurgical engineering, other general contracting projects, etc.; 6) Other business: military machinery, mining machinery, engineering machinery, etc.

The company's revenue for material handling equipment and new energy equipment in 2022 was 2.92 billion/2.66 billion yuan, accounting for 28.2/25.6 percent. In 2022, material handling equipment and new energy equipment as the company's main business accounted for the largest proportion of the two, accounting for 28.2/25.6, respectively, revenue reached 2.92 billion/2.66 billion yuan, gross margin level of about 15%. Metallurgical equipment as the company's third largest main business, 2022 year-on-year increase of 0.87pct, gross margin of 18.1, the company's five main business of the highest, 2022 to obtain operating income of 1.88 billion yuan. The company's military machinery, mining machinery and other businesses have an annual income of 0.29 billion yuan, with a gross profit margin of about 50.5.

The company will achieve revenue of 10.36 billion yuan/YoY plus 13.7% in 2022, and achieve a net profit of 0.288 billion yuan/YoY plus 149.7%. In 2020/2021/2022, the company's operating income was 8.16 billion/9.11 billion/10.36 billion yuan, and the net profit attributable to the parent company was 0.059 billion/0.115 billion/0.288 billion yuan, respectively. In 2022, the company's revenue and net profit attributable to its parent increased significantly, mainly due to the obvious growth in the two major business sectors of metallurgical equipment and general contracting of engineering. Among them, the general contracting of engineering is partly due to the rapid development of photovoltaic and chemical industries, especially the large demand for silicon materials in the front section of photovoltaic for industrial silicon furnaces. In 2022, the year-on-year order will be more than 0.8 billion yuan, prompting the rapid growth of general contracting of industrial silicon furnaces and calcium carbide furnaces. In the first three quarters of 2023, the company achieved revenue of 9.23 billion yuan/YoY plus 23.9%, and achieved a net profit of 0.32 billion yuan/YoY plus 34.1%, maintaining a strong growth momentum.

The company's profitability improved, with a net interest rate of 2.8/3.4% for 2022/1-3 Q23, respectively. The company's gross margin has remained stable in recent years and has remained above 20% all year round. Starting from 2021, the company will continuously improve its net interest rate by increasing the proportion of business sectors with higher profit margins such as metallurgical equipment and general engineering contracting in total operating income, as well as piloting the "five-in-one" cost control mode of production, marketing, research and procurement, and establishing a new cost control mechanism. The net interest rate of 2021/2022/1-3 Q23 is 1.1/2.8/3.4 respectively.

The company's ability to control fees is better, the total cost rate has steadily decreased, and the research and development cost rate remains high. The sum of the Company's four fee rates for 2018/2019/2020/ 2021/2022 is 19.2%/18.8%/18.3%/17.5%/15.3%, respectively, which is in the process of steady decline and the various fee rates are controllable. When the total cost rate maintained a downward trend, the company's R & D cost rate has been maintained at about 7%, mainly because the company invested heavily in R & D, innovated to build a new R & D system, introduced scientific and technological innovation talents, and provided the company with long-term development momentum. The Company's financial expense ratio for 2022 was -1.2%, mainly due to an increase in foreign exchange gains due to changes in exchange rates.

Crane industry: intelligent, modular development, downstream drive ushered in the business climate inflection point.

As an important equipment in the manufacturing industry, cranes are widely used downstream. Crane refers to the mechanical and electrical equipment used for vertical lifting or vertical lifting and horizontal movement of heavy objects. It is an important tool and equipment for mechanization and automation of modern industrial production. Its downstream application industries mainly include: equipment manufacturing, energy and electricity, transportation and logistics, light industries such as automobiles, ships, metallurgy, building materials and papermaking, it is widely used in factories, mines, stations, ports, construction sites, warehouses, power stations and other fields and departments of the national economy. Therefore, its industry development boom is closely related to downstream industry demand. The company is a technology leader in the field of bridge cranes. According to China's national standard GB/T20776-2006 "Lifting Machinery Classification", the company in the lifting machinery business segment of the main products of bridge cranes and gantry cranes belong to the bridge crane category. 1) Bridge crane: The 5-20000 ton bridge crane designed and manufactured by Dalian Heavy Industry in accordance with international standards has excellent quality and advanced technical performance, and is widely praised by customers. Since 1949, the company has designed and manufactured more than 40000 bridge cranes, involving 9 series and more than 50 specifications. 2) Gantry crane: 5 tons to 1000 tons gantry crane is one of the series products of Dalian Heavy Industry. It has reliable performance, easy maintenance and strong adaptability. It is widely used in shipbuilding, hydropower, railway and stock yard. Since 1954, Dalian Heavy Industry has developed ten varieties and hundreds of specifications of gantry cranes, and its product design and manufacturing level has ranked among the international advanced ranks.

The business climate of the crane industry is cyclical and is expected to usher in the next growth period. As a typical intermediate conductive industry, the speed and degree of development of cranes are usually closely related to the macroeconomic cycle, and to a certain extent are affected by the scale of national fixed assets and infrastructure investment. Due to the combined effects of equipment replacement and cyclical changes in downstream demand, its business climate is cyclical. Under the "4 trillion yuan" stimulus policy in 2008, China's crane sales ushered in a period of about three years of growth. Since 2011, the domestic economy has entered a period of low growth, crane sales have entered a downward phase of about five years of growth, and enterprises in the industry have completed the elimination and reshuffle over the same period. In 2016-2017, supply-side reform led to a rebound in the manufacturing industry, while combined with the stock of equipment into the replacement stage, the industry boom ushered in another high growth stage. After nearly two years of Chinese crane sales down, the industry is expected to usher in the next growth period.