Incident: The company disclosed its semi-annual report for 2023. 2023H1 achieved revenue of 1,724 million yuan, +2.87% year on year; realized net profit of 86.44 million yuan, year-on-year ratio of -38.99%; realized net profit of 65.43 million yuan after deduction, -47.66% year on year, lower than our expectations. This was due to a year-on-year decline in gross margin of tungsten products, a year-on-year increase in period expenses, and a year-on-year decrease in by-product sales. 2023Q2 achieved revenue of 901 million yuan in a single quarter, +12.2% year-on-year, and net profit of 51.37 million yuan, -32.4% year-on-year and +46.5% over the previous quarter, an improvement over the first quarter of this year.

Prices of tungsten raw materials are high, and the simultaneous rise in product costs is squeezing gross profit margins. In the first half of 2023, the average price of tungsten concentrate (65% tungsten concentrate price in Jiangxi) was 119,000 yuan/ton, and the average price of ammonium paratungstate (Jiangxi WO3≥ 88.5% ammonium paratungstate market price) was 178,300 yuan/ton, respectively, up 3.2% and 1.1% year-on-year, respectively. After continuing to rise, the price of tungsten raw materials was at a high level in the past two years, driving product costs to rise simultaneously, while the market price of tungsten products fluctuated little. Squeeze the company's gross profit margin for tungsten products was 10.71%, down 1.97 pcts from the previous year. 2023H1 Among them, tungsten powder and tungsten carbide powder are at the middle end of the industry chain. Affected by the rise in tungsten concentrate prices, gross margins were 7.81% and 7.92% respectively, down 3.16 pct and 3.38 pct, respectively. In terms of hard alloys, due to falling blade costs in Ganzhou and the increase in sales of high-value-added blades, 2023H1 achieved a gross profit margin of 15.02%, an increase of 1.04 pct over the previous year.

Ganzhou Oktay is stepping up research and development efforts and speeding up application deployment in the industry. In the first half of this year, Oktay products entered the aviation industry electronic procurement platform, and samples are currently being sent to key customers. In the small parts industry, Ganzhou Oktay has launched 300 blades and 200 tool holder products. Some product effects can reach the level of international first-tier brands. 2023H1 Ganzhou Oketai's blade sales volume and sales revenue maintained steady growth. Blade sales revenue was 135 million yuan, an increase of 36.09% over the previous year, and gross margin further increased.

Profit forecasting. We focus on the profit model of our subsidiary Oktay. The import substitution logic will contribute volume and price increases to the company. Considering that high prices of tungsten concentrate squeezed profits and demand fell short of expectations, we lowered the company's revenue and net profit due to income. We expect the company's revenue from 2023-2025 to be 3.6, 44 billion yuan, and 4.8 billion yuan respectively (previous values were 3.6, 4.5 billion yuan, 4.9 billion yuan, and 4.9 billion yuan respectively), with year-on-year growth rates of 16%, 31%, and 11%. Corresponding to the market value of 6.9 billion yuan on August 21, 2023, PE was 29x, 22x and 20x, respectively. Maintain a “buy” rating.

Risk warning: APT prices fell sharply; production capacity of ultra-fine tungsten carbide powder fell short of expectations; downstream market demand for blades and bars fell short of expectations.