Debon Securities: Attaching importance to the Western Development Strategy, the civilian explosion industry is expected to fully benefit

The Zhitong Finance App learned that Debon Securities released a research report saying that the 14th Five-Year Plan proposes “implementing major projects such as the Sichuan-Tibet Railway, the new land and sea corridors in the west, the national water network, and hydropower development in the lower reaches of the Brahmaputra River,” which is beneficial to the application of the explosion in railway roads, water conservancy and hydropower. On the other hand, demand in some high-risk debt provinces is under pressure. Among them, the gross domestic product of enterprises in western provinces such as Yungui, Gui, and Yu all fell by more than 20%. In the context of the development of the western region, as debt conversion policies continue to be implemented, the recovery in infrastructure is expected to drive the recovery of the burgeoning economy. Furthermore, following the situation of Guangdong Hongda and Jiangnan Chemical acquisition companies in recent years, the overall purchase price of a single ton of explosives production capacity has increased, and industry assets may have been re-valued.

The main views of Debon Securities are as follows:

Incident: On August 23, the Politburo meeting reviewed “Certain Policies and Measures to Further Promote Western Development and Form a New Pattern”. Recently, the General Secretary once again emphasized the need to consistently implement the Party Central Committee's policies and initiatives to promote the development of the western region.

Attaching importance to the Western Development Strategy, the explosion is expected to fully benefit

According to data from the China Explosive Association, the downstream demand areas for explosives in the industrial explosion industry in 2020 were metal mines (about 25.9%), non-metallic mines (about 24.7%), coal (about 22.0%), infrastructure, etc. (about 27.4%). Driven by the construction needs of major western development and resource endowments in the west, they are optimistic about the continuation of the boom in the civilian explosion industry in Xinjiang, Tibet and the restoration of infrastructure needs in high-risk debt provinces.

Coal mining in Xinjiang is accelerating, and the boom is expected to continue. Earlier, the “Implementation Plan to Accelerate the Construction of Large-scale Coal Supply Guarantee Bases in Xinjiang to Serve National Energy Security” clearly and comprehensively accelerate the construction of a coal mine project with an additional production capacity of 160 million tons/year in Xinjiang, fully releasing advanced and high-quality coal production capacity, and striving to reach more than 460 million tons/year in 2025 (output reached 457 million tons in 2023). From January to August 2024, a total of 324 million tons were mined, +15.7% compared with the same period, leading the country by +15.7 pct. In the future, with the in-depth implementation of the “three bases and one channel” and the opening of the export channel, it is expected that the coal security position of Xinjiang will be further strengthened.

Tibet's infrastructure is speeding up, and non-ferrous resources are being increased. The 14th Five-Year Plan proposes major projects such as the “implementation of the Sichuan-Tibet Railway, the new land and sea corridors in the west, the national water network, and hydropower development in the lower reaches of the Brahmaputra River”, bringing benefits to the application of civilian explosions in railway roads, water conservancy and hydropower. The Brahmaputra River Super Hydropower Station has been included in the long-term goal of 2035, and water infrastructure is expected to accelerate. In addition, non-ferrous mineral resources in the region are also expected to greatly boost demand. The Julong Phase II renovation and expansion project for China's largest Julong copper mine has begun, and the annual copper production after completion will double compared to 2023.

The debt conversion policy has been implemented, and demand has been repaired. According to data from the China Bomb Association, from January to August 2024, the total production and sales values of China's civilian explosion manufacturers were 26.264 billion yuan and 26.042 billion yuan respectively, -6.64% and -6.18% year-on-year respectively; the total profit achieved was 6.158 billion yuan, +12.30% year-on-year. The economy is divided among the provinces. Among them, the gross domestic product of mining enterprises in Xinjiang and Tibet maintained a high growth rate, +26.1% and +85.8%; demand from some high-risk debt provinces was under pressure. Among them, the gross domestic product of enterprises in western provinces such as Yungui, Guiyu and Chongqing all fell by more than 20%. In the context of the development of the western region, as debt conversion policies continue to be implemented, infrastructure recovery is expected to drive the recovery of the boom boom.

Increase concentration and optimize the pattern, and be optimistic about the revaluation of civilian explosion assets

According to the “14th Five-Year Plan for the Civilian Explosion Industry”, the concentration of the civilian explosion industry has been further increased. It is required that by the end of 2025, the CR10 industry concentration of civilian explosion enterprises nationwide will increase from 49% in 2020 to 60+%, and mergers and acquisitions among civilian bombing companies will accelerate. According to data from the China Explosive Association, the total CR10 gross domestic product of the industry reached 26.19 billion yuan in 2023, accounting for about 59.98% of the total output value of the industry, which is beneficial to industry leaders. At the same time, the civilian explosion industry is a “licensed” industry. The authorized production capacity of explosives and detonators, the core resources of the industry is limited. In principle, no new production capacity can be purchased in the future. According to data from the China Explosive Association, in 2023, the country will produce 4.581 million tons of explosives and 724 million industrial detonators.

Debon Securities believes that as policies drive integration and continue to advance, the assets that can be acquired by the industry have plummeted, and the scarcity of civilian explosion resources is highlighted. Following the situation of Guangdong Hongda and Jiangnan Chemical acquisition companies in recent years, the overall purchase price of a single ton of explosives production capacity has increased, and industry assets may have been re-valued.

It is recommended to focus on the targets: Yipuli (002096.SZ), Jiangnan Chemical (002226.SZ), Guangdong Hongda (002683.SZ), Xuefeng Technology (603227.SH), Gaozheng Bomb (002827.SZ), Jinaobo (002917.SZ), Kailong (002783.SZ), Huhua (003002.SZ), and Poly Union (002037.SZ).

Risk warning: Policies fall short of expectations, demand falls short of expectations, raw material prices fluctuate.