1Q19 performance meets expectations

Zhangyuan Tungsten Industry announced its 1Q results in 2019: operating income was 450 million yuan, down 4% from the same period last year, and the net profit attributed to the parent company was 7.14 million yuan, an increase of 7.6% over the same period last year, corresponding to 0.008 yuan per share, which was in line with our expectations. The non-return net profit was-16.42 million yuan, a decrease of 16.91 million yuan over the same period last year, and non-recurrent profit and loss included 26.65 million yuan of government subsidies. The decline in 1Q19's profit year-on-year is mainly due to the weakening of market prices compared with the same period last year.

Comments: 1) Tungsten prices fell compared with the same period last year. The average price of 1Q19 domestic tungsten concentrate was 97,000 yuan / ton, down 13% from the same period last year and 3% from the previous year. The average domestic APT price was 1520,000 yuan / ton, down 13% from the same period last year and 4% from the previous year. 2) 1Q19's comprehensive gross profit margin decreased by 2.4ppt compared with the same period last year, and decreased by 10ppt to 12.9% compared with the same period last year. 3) the financial expenses increased by 7% compared with the same period last year, mainly due to the increase in interest expenses. The 1Q19 financial expense rate is + 0.6ppt to 5.4% year-on-year. 4) the loss of asset impairment increased by 29% compared with the same period last year to 13.01 million yuan. 5) R & D expenses increased by 31% compared with the same period last year. 5) the effective tax rate decreased by 31ppt compared with the same period last year, and decreased by 9ppt to 14.2% month-on-month.

Trend of development

The fundamentals of the tungsten industry are expected to improve. Since the beginning of the year, domestic tungsten concentrate and APT prices have dropped slightly by 0.5% and 2.3% to 96,000 yuan / ton and 147,000 yuan / ton, respectively. With the gradual improvement of the domestic liquidity environment and manufacturing industry, the demand of tungsten downstream industry is expected to continue to recover, supporting prices.

Profit forecast

We keep the profit forecast of 2019amp 20e 0.04 pound 0.04 yuan unchanged.

Valuation and suggestion

The current share price of the company corresponds to 2.7 times of 2019 Universe 2.7 Placement B. We maintain a neutral rating and target price of $7.0, which corresponds to 3.2 times the price of 2019 Universe, which is 3.2 times more than the current price, which is 17% higher than the current price.

Risk

Downstream demand was lower than expected, and tungsten prices fell more than expected.