Zhangyuan Tungsten Industry: A key enterprise in the tungsten industry that opens up the industrial chain. At present, the company has formed a complete industrial chain. The products are upstream tungsten concentrate - ammonium metatungstate (APT) - tungsten oxide - tungsten powder - tungsten carbide powder - thermal spray powder/hard alloy. The company uses tungsten concentrate as raw material, covering the whole industry chain and has a rich product matrix. Raw material end products: tungsten concentrate, ammonium paratungstate (APT). 2022H1's upstream raw material self-sufficiency rate accounts for about one-fifth, and the shortfall needs to be purchased from abroad. Midstream products: tungsten powder and tungsten carbide powder are the main raw materials for the production of hard alloys. Downstream products: thermal spray powder, hard alloys, coated blades, bars, of which the coated blades and bars are all produced by the subsidiary Octay.
Rely on Jiangxi tungsten ore resources and enjoy the dividends of rising tungsten ore prices. The company owns 6 mining rights mines and 8 prospecting rights mining areas. It continues to increase exploration efforts in various mining rights mines and prospecting rights mining areas. Through the integration of existing mineral rights, the company continuously improves the comprehensive utilization rate of resources and consolidates resource security capabilities. The ore bodies of the production mines to which the company belongs are all quartz vein type black tungsten ores. Apart from tungsten metal elements, the main associated minerals in each mine include tin, copper, pyrite, zinc, etc., which have now been recycled. As of the 2022 semi-annual report, the company's mineral rights hold 901,000 tons of tungsten resource reserves, 14,800 tons of tin resources, and 12,000 tons of copper resources. The supply side of tungsten resources continues to implement total control, and a recovery in consumption may drive a moderate rise in prices.
The deep processing sector is operating steadily, and Acotai blades and bars have entered a period of performance release. Currently, the company has a production capacity of 15,000 tons of tungsten carbide powder, a production capacity of 10,600 tons of tungsten carbide powder. After the production capacity of 5,000 tons of ultrafine tungsten carbide powder is fully implemented, the company's tungsten carbide powder production capacity is expected to reach 15,600 tons, an increase of 47.17%. Ganzhou Aoketai, a wholly-owned subsidiary of the company, has a production capacity of 20 million pieces/year and a production capacity of tungsten carbide bars of 1000 tons/year. The capacity utilization rate in 2021 was around 70%, and there is still room for improvement. After more than ten years of R&D, Octac achieved its first profit in 2021. We judge that it has entered a performance release period. At present, the carbide coated blades produced by Octac have partially replaced imported products from Europe and the US, promoting the localization of tools in the equipment manufacturing industry.
Profit forecasts. We are optimistic about the implementation of the company's 5,000 tons of ultrafine tungsten carbide powder production capacity to further realize intelligent production with independent intellectual property rights in the field of ultra-high performance tungsten powder preparation. In terms of price, we assume that the 2022-2024 APT market price will be 173/175/180,000 yuan/ton, respectively. We focus on the profit model of our subsidiary Octac. The import substitution logic will contribute to volume and price increases for the company. We expect the company's revenue for 2022-2024 to be $3.2, 36, and 4.4 billion yuan respectively, and net profit of $2.1, 330, and 450 million yuan respectively, with year-on-year growth rates of 28%, 54%, and 38%. The PE corresponding to the market value of 7.6 billion dollars on April 14, 2023 was 36x, 23x, and 17x respectively, which is lower than the average PE of comparable companies, giving it a “buy” rating.
Risk warning: APT prices have dropped sharply; the pace of production capacity of ultrafine tungsten carbide powder fell short of expectations; downstream market demand for blades and bars fell short of expectations.