Tiangong International disclosed its results for the first half of 2022: revenue rose 2.0 per cent year-on-year to 2.67 billion yuan; gross profit fell 1.7 per cent year-on-year to 660 million yuan; gross profit was 24.5 per cent, down 1.0ppt; operating profit fell 0.8 per cent year-on-year to 380 million yuan; net profit increased 1.6 per cent to 300 million yuan.

Our comments are as follows: due to the supply gap caused by the overseas energy crisis, China's exports are strong, and the company's export business increased by 59.5% compared with the same period last year, but domestic demand was weak, down 15.4% from the same period last year. Overall, revenue from the core business except trade increased by 25.7% compared with the same period last year. The cancellation of export tax rebates and weak domestic demand affected price transmission, and the core gross profit margin fell 6.8ppt in the first half of the year compared with the same period last year.

The revenue of die steel in the first half of the year increased by 22.2% year-on-year to 1.38 billion yuan, while export revenue increased by 92.5%, accounting for an increase in 24.0ppt to 65.7%. The cancellation of export tax rebates and weak domestic demand affected price transmission. H1 gross profit margin fell sharply to 21.5% from the same period last year, while gross profit per ton fell 11.3% compared with the same period last year.

Revenue from high-speed steel rose 24.5 per cent year-on-year to 530 million yuan, while export revenue rose 112.0 per cent to 310 million yuan, accounting for 58.8 per cent, while gross profit margin fell 6.3ppt to 24.3 per cent. The product structure of high-speed steel is advanced to the high end, reflecting excellent cost transmission capacity, with a gross margin of 724 yuan / + 6.2% higher than the same period last year.

Demand from Europe and the United States fell back, with revenue from cutting tools falling 8.9% year-on-year to 420 million yuan in the first half of the year. The company focused on high value-added products strategy to improve gross profit margin, which increased 0.4ppt to 28.5%.

Substantial progress has been made in the transformation of the high-end civilian market of titanium alloy, with business development in areas such as high-end glasses manufacturing and 3D products, with revenue up 56.6% year-on-year and gross profit margin significantly improved to 20.2%.

The contribution of overseas operations increased, but its account period was longer, resulting in accounts receivable turnover days from + 19 days to 143 days, inventory turnover days from + 23 days to 190 days, and cash turnover days from + 29 days to 210 days compared with the same period last year.

The development of high-end precision tools is methodical. The second phase of powder metallurgy (3000 tons / year) will enter trial production in the fourth quarter, and it is planned to complete the output of 10 million powder taps in 2023. The company expects to trial-produce full-process cemented carbide tools in the second half of the year, with a planned production capacity of 300t of cemented carbide bars + 2000 blades + 3 million cutting tools.

Our view: domestic demand remains sluggish in the second half of the year, but in the context of overseas energy crisis, export business with product competitiveness and price attractiveness is expected to continue to do well. The production line of the second phase of powder metallurgy and 7000t fast calcination project is expected to be completed by the end of the year; the production line of high-end tools will be put into production soon, and the trial production of full-process cemented carbide tools will be launched in the second half of the year. Thailand's second phase of the project is also expected to contribute another 5000 million pieces of annual production capacity within this year, which will significantly promote the improvement of the added value of the company's finished products. We adjust the company's profit forecast that the company's revenue from 2022 to 2024 is expected to be 61.8,66.1 and 7.08 billion yuan, respectively, which is + 7.6%, + 7.1% and + 7.1% respectively, and the net profit from home is 6.9,8.3 and 930 million yuan respectively, and the year-on-year net profit is + 3.3%, + 20.7% and + 12.1%, respectively. The target price is HK $3.00.The PE corresponding to the 2022 forecast EPS is 10 times.

Risk tips: repeated epidemic situations, economic decline at home and abroad, and a trade environment that is not conducive to exports.