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Editor's note: In the "2023 Annual Report of Kaishan Co., Ltd." released recently, Cao Kejian, chairman of Kaishan Holding Group Co., Ltd., personally wrote the "Speech of the Convener of the Strategy Committee of the Board of Directors" and the three chapters of "Core Competitiveness Analysis" and "Prospects for the Company's Future Development" in the third section. It reviews and summarizes the company's transformation and upgrading development process and achievements in the past ten years, and puts forward clear requirements for the work goals of the management team in the next 3-5 years. The editorial department now excerpts and publishes the relevant chapters written by the chairman of the board of directors for all management cadres of the group to learn, and requires each member company to formulate specific implementation measures according to their own actual conditions, implement specific work requirements as required, and ensure the realization of the company's strategic goals and tasks.

Message from the Convenor of the Strategy Committee of the Board of Directors

After a whole year of business practice in 2023 and thinking and observation in operation, the company has a clearer and deeper understanding of the current new pattern and general trend of global political economy. In this context, we are more convinced that the two strategic goals of "becoming a multinational company" and "becoming a comprehensive compressor company" established earlier are not only in line with the long-term interests of the company's development, but also the right choice to adapt to the changes in the current global political and economic environment. To that end, we must move towards the goal of "globalization of sources of income" and "diversification of sources of income" with greater determination and stronger measures.

Looking back on the past, in 2009, after the honor of inviting Dr. Tang Yan as the general manager of the company, the company invested heavily in research and development, under his leadership, the company developed a large number of high-tech products, and successfully promoted them in the market. After 14 years of continuous efforts, the company has become one of the very few manufacturers in the global compressor industry with a full spectrum of compressor products. At the same time, the company's compressor products are significantly ahead of the world's peers in energy efficiency as the main competitive advantage, and have achieved a leading position in the domestic market, and thus successfully entered the world's major markets, occupying a certain market share, and the "Kaishan" brand has begun to become a well-known brand in the global market.

In 2016, the company acquired the SMGP geothermal project in Indonesia and started construction at the end of the year, so 2016 can be regarded as the "first year of geothermal energy". In the past 8 years, we have invested heavily in the construction and operation of nearly 10 geothermal power stations in major geothermal development countries, and the gains and losses of these 8 years are the main ones: first of all, we have mastered all the engineering experience and knowledge of the whole process of geothermal development, of course, this relies on Kaishan's technical accumulation in the field of compressors for many years; secondly, it has a professional team that supports the whole process of developing geothermal projects; Last but not least, we have successfully developed and finalized a complete set of power generation equipment for the wellhead modular power station, which has been recognized by the industry for its advantages of high efficiency, high availability, high reliability, relative low cost and short construction period, which is a disruptive technological innovation achievement. The process was difficult, but through the company's efforts, it has changed the status quo of decades of technological stagnation in the geothermal industry, and most importantly, it is certain that the geothermal business will become an important growth pole in addition to the compressor business, and the geothermal business revenue will have a more stable cash flow and higher profit margins.

In recent years, the company has strived to do "difficult but correct things", and difficult and successful will enter the "blue ocean"; Yi stayed in the "Red Sea" and fought involutionally. The company's management knows that becoming a multinational company and transforming into the new energy industry is on the "difficult but correct" road, and it is necessary to face risks, but it still has great courage to implement the globalization strategy. After 2023, we can declare that we have achieved initial success, completing a "thrilling jump". After the successful transformation, it can be seen that the overseas market has a high entry threshold and a higher and more stable gross profit margin; The overseas market has more space, which can make up for the lack of sales growth in the domestic market; Geothermal electricity fee revenue is denominated in US dollars, and "take-or-pay" ensures stable cash flow in US dollars; The global energy transition and "carbon neutrality" constraints provide a large enough space for the company to transform and ensure that the company can continue to grow in this field in the future; The sales scale of a single contract for complete power generation equipment and large gas compressors is also incomparable with traditional air compressors. The operating results in overseas markets prove that the company has and will go deeper into the "blue ocean market".

Needless to say, in the process of transformation and upgrading, the company faces various risks and bears huge risks. However, the company has always made risk aversion a priority, and today, the main risks have passed:

First of all, the development of complete sets of power generation equipment for wellhead modular power station has been nearly completed, and various series of compressors, including hydrogen compressors, have been developed and widely used in the domestic market, and the reliability and availability have been verified, and the technical risks have basically non-existent;

Secondly, compressor products have opened up the world's major markets, including the most difficult North America, India, Europe, etc., established a reputation, has a certain market share, and the market share is still expanding, basically eliminating market risks;

The third is the security of overseas assets, which is of concern to both the company and its shareholders. Before investing, the company will do in-depth research on the politics, history, culture, religion, credit and many other aspects of the country where the investment is located, give priority to the investment in countries with a more perfect democratic system, and pay special attention to the credit of the country where the investment is located to international financial institutions and capital markets. The security of the assets is guaranteed;

Finally, there are domestic policy risks. In this regard, on the one hand, the company will pay more attention to compliance, pay attention to learning and understanding policy trends, and strive to avoid risks in this regard; On the other hand, we firmly believe that China's economy needs not only foreign trade and exports, but also multinational corporations.

Starting in 2024, the company will also try to become an important participant in the construction of a "hydrogen society", in addition to providing compressor products for the "production, storage, transportation and processing" of hydrogen energy, the company will also explore the possibility of participating in the use of geothermal green hydrogen production. Geothermal green hydrogen production will avoid the uncertainty of the demand side of green electricity and, if successful, will open up new market space for the company.

Based on the "globalization strategy" and "transformation into a new energy enterprise and upgrading into a comprehensive compressor company strategy", the company's management has set business goals for the next 3-5 years: the annual power generation and operating income of overseas geothermal power stations will reach 300 million US dollars; The annual revenue of the overseas compressor business reached 300 million US dollars; The annual revenue from overseas power generation equipment sales (EPC engineering) reached 100 million to 200 million US dollars; The domestic market is stable and progressive, on the basis of 2 billion yuan of air compressor revenue, the new gas compressor revenue is about 700 million yuan, and at the same time focus on cultivating and developing fluid machinery and refrigeration industry including heat pumps. The achievement of the above business objectives will ensure that the company remains on the track of sustainable growth in a relatively uncertain business environment.

"Core Competitiveness Analysis"

First-class R&D capabilities

Since 2009, the company has set up R&D centers and technology centers in Seattle, Shanghai, Austria, Alabama and other places. The establishment of these scientific research institutions is the result of the company's integration of global resources, and is the fundamental reason why the company has become a leading enterprise with global reputation from a small enterprise with low-end air compressors as the leading product. Our technical capabilities are incomparable to those of our domestic counterparts, even compared with our foreign counterparts.

Seattle R&D Center

The main R&D direction is axial compressors and expanders, and the world's top compressor experts, including the company's general manager Dr. Tang Yan and the company's director Bruce Biederman, have brought the company's innovative results to the company in the center are 10-15 MW axial ORC expansion generators. This achievement is applied to the SMGP power station and the Sosian power station, where nearly 10 units operate much more efficiently than similar products, and the reliability and high availability have also been proven. It also shows that the company has the world's top compressor research and development capabilities.

LMF R&D Center in Austria

The main R&D direction is high-pressure and ultra-high-pressure hydrogen compressors. LMF is one of the world's leading manufacturers of high-pressure reciprocating compressors, known for its technical capabilities and high-quality products, which have a very high market share in many market segments. In order to meet the huge needs of Europe's energy transition, the R&D center has set up a hydrogen compressor research institute, and the hydrogen compressor products that have been successfully developed and are under development have better technical characteristics than the diaphragm compressors mainly used in China.

KCA R&D Center, Alabama

The main research and development direction is the dry oil-free screw compressor, the center team has inherited the "100 years of engineering experience", has developed a 45-160kW dry oil-free screw air compressor has been sold in United States, China, the Middle East, Southeast Asia market, the product has the same excellent performance as Kaishan oil-injected screw air compressor, higher energy efficiency, lower noise.

Shanghai R&D Center - Kaishan General Machinery Research Institute

Led by Dr. Tang Yan, the institute is the main force of Kaishan's research and development, and consists of the main engine research institute, gas compressor research institute, centrifugal compressor research institute, hydrogen compressor research institute, automatic control research institute, ORC expansion power generation equipment research institute, steam expansion/compression research institute, power station peripheral system integration research institute, power station control research institute, power station power system research institute, Chongqing Fluid Machinery Research Institute, Quzhou compressed air system research institute and Shunde single screw and scroll compressor research institute. Nearly 100 engineers and technicians in the Shanghai R&D center have launched countless innovative achievements to promote the company's continuous transformation and upgrading, growth and expansion.

Sales channels and sales network all over the world

For a long time, the distribution network in every corner of the market in the country is the core competitiveness of Kaishan. Although in the past ten years, the company has made every effort to build a competitive advantage with R&D and innovation capabilities as the core and has succeeded, but the channel-sales network advantage is still the company's core competitive advantage. And the extension of this advantage continues to expand, up to now, the company's sales network in China, North America, Australia is close to and fully cover the market, in Europe, Southeast Asia, the Middle East, India and other regions of the sales network is also under construction, coverage is expanding.

Professional, dedicated and excellent team

After the company has determined the strategic goal of "becoming a multinational company", the key to the smooth implementation lies in the people and the team. In particular, one of the company's visions is to become a major developer and operator of geothermal new energy in the world, and geothermal development involves a number of engineering disciplines such as geology, drilling, civil engineering, installation, etc., which requires an engineering and technical team, business experts who are familiar with the British and American legal systems and international practices, and overseas compressor business also needs professionals who are familiar with various different markets. After years of accumulation, the company has a team of professionals who include all multidisciplinary professionals, which constitutes another core competitiveness of the company.

In addition, it is particularly worth mentioning that the management team of each domestic manufacturing base has high work efficiency, good professionalism and strong coordination ability, which has been praised and recognized by overseas employees and realized the efficient operation of the company.

Excellent corporate culture

So far, the company's overseas team is composed of employees from more than 20 different countries and regions, these team members come from each continent, with different cultures and beliefs, but because the company has excellent cultural support, to ensure the stability of the team, according to the company's set work goals.

Entered the blue ocean

The strength of core competition also depends largely on the intensity of competition in the market. Due to the success of the company's overseas business, especially the geothermal business, compared with its competitors, the company has a richer product line, a more diverse market, and the geothermal business is in the "blue ocean", which also constitutes the company's core competitiveness to a certain extent.

"Prospects for the future development of the company"

The series of achievements made by the company's operation in 2023 give us reason to believe that there will be a phased inflection point in 2024 for the medium and long-term improvement of the company's operation, and accordingly plan and look forward to the business goals for the next three to five years.

Achievements in 2023 include:

1. SMGP geothermal power station phase IV COD in Indonesia and Sosian power station COD in Kenya;

2. The hydrogen compressor was successfully put into operation and accepted in the hydrogen (hydrogen-rich) smelting model projects such as Baowu Group and HBIS Group, and exported hydrogen compressors to hydrogen smelting projects outside China of Italy Danieli Group. Kaishan gas compressor has also successfully entered the leading enterprises of petroleum refining and chemical central enterprises, and its technical performance has been recognized;

3. Centrifugal compressors have large-scale sales in various market segments, among which, argon compressors occupy the largest market share in China and have established a reputation;

4. The magnetic levitation blower/vacuum pump/air compressor developed by Chongqing Fluid Machinery Co., Ltd. has successfully entered the textile, fermentation, sewage treatment, oxygen production and other market segments, and the variable pitch dry vacuum pump has entered the new energy head enterprise in batches;

5. Dry oil-free screw compressor has been successfully developed and put into the North American, Middle Eastern, Southeast Asian and domestic markets, and the indicators are at the international leading level;

6. In a relatively unfavorable business environment, KCA (United States) and KMI (India) still achieved sales revenue and operating profit growth, among which the profit increase was particularly prominent, and Kaishan MEA, which is responsible for the Middle East/Europe/Africa market, started business.

Our business goals and plans for the next three to five years are:

1. The sales of traditional domestic air compressors remain at a revenue level of about 2 billion yuan, and strive to maintain a slight growth. With the domestic large-scale infrastructure construction has come to an end, the real estate industry has shrunk seriously, and the company's engineering and mining business income has shrunk significantly, and this part of the income was originally the company's highest market share, the strongest competitiveness and the most stable in the domestic market. Although the company has made great efforts to cultivate the industrial market in recent years and has gained a lot, it is difficult to maintain growth while filling the "collapse of the engineering and mining markets". In the next 3-5 years, the company will rely on the growth of centrifugal air compressors, dry oil-free screw air compressors and other businesses to maintain the scale of traditional business revenue, and strive to grow.

2. The revenue of gas compressor business reached and exceeded 700 million yuan. After more than 10 years of hard work, Kaishan gas compressor business has established model projects in almost all application fields and established a good market reputation. The technical threshold and barriers of the gas compressor business are high, there are few market participants, and the company's competitors are mainly foreign enterprises and central enterprises. Although the company's products have obvious technical advantages - the new generation of screw profiles provides a higher pressure ratio; ensuring greater energy efficiency; The largest screw compressor in China provides customers with better and more choices; And the company is still one of the very few gas compressors that can provide water injection/fuel injection/dry oil-free screw gas compressors, high-pressure reciprocating gas compressors, centrifugal gas compressors and other different technical forms of gas compressor enterprises, but limited by the special domestic competitive environment, as well as the customer's cautious attitude towards the selection of new brands, the company took 10 years to make a complete breakthrough. As the company's hydrogen compressor has achieved a leading position in hydrogen energy application, it is expected to gain a competitive advantage and have more revenue in the construction of a "hydrogen society" in the future, and the company plans to achieve a revenue scale of at least 700 million yuan in the gas compressor business in the next 3-5 years.

3. Fluid machinery is another key business segment of the company. At present, Chongqing Institute of Fluid Machinery has completed the development of several models of magnetic levitation blowers/vacuum pumps/air compressors and variable pitch dry vacuum pumps, and have been applied in almost all market segments. But there is still a lot of product development that takes time to complete, and there is still a lot of marketing work to be done. The company plans to achieve a revenue of 300 million yuan in the fluid machinery business in the next 3-5 years.

Refrigeration industry, including heat pumps. With the technical advantages accumulated by the company's screw compressors, starting in 2024, the company will enter the refrigeration industry, trying to compete with the energy efficiency advantages of compressors, and become another potential growth pole for the company.

5. "To become the world's leading geothermal power plant operator" is one of the company's visions. It is planned that in the next 3-5 years, the annual power generation and operating income of overseas geothermal power stations will exceed 300 million US dollars, and the specific breakdowns are: (1) SMGP and SGI power stations in Indonesia will provide 140 million US dollars of annual revenue; (2) Kenya geothermal power plants provide $0.6-$100 million in revenue; (3) United States completed the construction of 5-6 geothermal power plants with 100 MW of net external electricity, with an annual revenue of 60 million US dollars; (4) Geothermal power plants in Turkey and Europe achieved revenue of 50 million US dollars.

6. "To become the world's leading compressor manufacturer" is another vision of the company. In 2023, the company's overseas compressor business revenue will be about 150 million US dollars, and in the next 3-5 years, the company plans to increase the overseas compressor business revenue to 300 million US dollars, of which the revenue of the United States subsidiary KCA and the Austrian subsidiary LMF will be increased to 100 million US dollars, and the rest include Kaishan Asia Pacific Company, Middle East Company (KMEA), India Company (KMI), Australia Company (KA) and other companies to achieve revenue of 100 million US dollars.

7. The company will also be committed to the sales of complete sets of power generation equipment and biomass power generation equipment for wellhead module power stations, and strive for annual sales revenue of 1-200 million US dollars in the next 3-5 years.

Achieving the business goal of overseas revenue of more than 600 million US dollars means that the company has become a multinational company in the true sense of the word, which will ensure that the company is still on the track of sustainable growth in a relatively uncertain business environment.