The company's precision copper belt production ranks first in China. The subsidiaries Tianniao Hi-Tech and Dingli Technology are respectively the only domestic enterprise that industrially produces carbon brake prefabricated parts for aircraft and a leader in high-end thermal equipment. Combined with the expansion of the company's product range into fields such as photovoltaic thermal field carbon/carbon composites, 3D printing materials and components, its comprehensive strength and core competitiveness are expected to continue to improve and maintain a “buy” rating.

Net profit for 2023H1 was -24.02% year-on-year, and Q2 revenue hit a record high in a single quarter. In 2023H1, the company achieved operating income of 21,571 million yuan, +4.86% year-on-year; net profit attributed/net profit of 213/111 million yuan, year-on-year, -24.02%/-94.08%; operating cash flow - 843 million yuan, -0.07% year-on-year. Among them, 2023Q1 achieved operating income of 9.580 billion yuan, +1.44%/-11.10% year on year; net profit of 95 million yuan, year over year/month on year, -16.94%/+181.88%; net profit after deducting non-return net profit of 0.02 billion yuan, -96.86% yo/month over year/ not applicable. 2023Q2 achieved operating income of 11.991 billion yuan, +7.77%/+25.18% year on year; net profit of 119 million yuan, year over year/month on year, -28.87%/+25.19%; net profit after deducting non-return net profit of 0.08 billion yuan, -91.97%/+237.40% year over year.

Main factors of revenue growth: 1) The advanced copper-based materials sector increased in volume and quality compared to 202H1, benefiting from the launch of the “300,000 tons of green intelligent manufacturing high-conductivity copper-based materials project (phase I)”. 2023H1 achieved revenue of 20.671 billion yuan, +4.89%, and achieved sales volume of 443,200 tons of copper-based materials, +7.65% over the same period; 2) The high-performance carbon fiber composite sector accelerated the increase in the scale of civilian goods while ensuring the supply of military goods. The subsidiary Tianniao Hi-Tech 2023H1 achieved revenue of 318 million yuan, +6.5 percent over the same period; 3) The new materials business in the high-end thermal equipment sector is growing rapidly. With the batch delivery of 3D printed structural parts and the completion and commissioning of the tantalum carbide coating project, the subsidiary Dingli Technology 2023H1 achieved revenue of 240 million yuan, +44.99% over the same period; 4) The three-fee rate was relatively stable. The sales/management/financial/R&D expense ratio of 2023H1 was 0.24%/0.83%/0.40%/2.10%, respectively, with year-on-year changes of -0.02/+0.06/+0.03/-0.53pcts.

R&D and manufacturing are integrated, and have always been at the cutting edge of advanced technology: according to the company's 2023 mid-year report, 2023H1:1) Advanced copper-based materials sector: subsidiary Anhui Xinhai Gaodao obtained the “Integrated Management System AA Assessment Certificate”; 2) High-end thermal equipment and new materials sector: ① Established the first production line for the entire metal 3D printing industry chain in Hunan Province. The technology covers master alloy design, smelting, milling, additive manufacturing, heat treatment, performance testing, etc., to develop advanced international 3D printing materials and components, already Successfully used in aerospace, military, medical and other fields; ② Overcoming key preparation techniques and equipment for third-generation semiconductor gallium nitride and silicon carbide single crystal growth and thermal field materials, developed “four high and two coatings” products: high-purity carbon powder, high-purity silicon carbide powder, high-purity carbon fiber insulation materials, high-purity graphite, silicon carbide-coated graphite base/plate, and tantalum carbide-coated graphite components. The performance indicators have reached the leading level in China.

Expand production in the horizontal and vertical direction to meet performance growth points: According to the investor relations activity records announced by the company, 1) Advanced copper-based materials sector: Currently, the company's copper-based materials production capacity is 650,000 tons/year, including 300,000 tons/year for copper strips and copper conductors, and 50,000 tons/year for copper alloy wire. In addition, with the progress of the “150,000-ton high-end fine wire production project” superimposed busbar project, the production capacity of copper conductors is expected to exceed 500,000 tons by the end of the 14th Five-Year Plan; 2) High-performance carbon fiber composite sector (Tianniao Hi-Tech): The first phase of the 480-ton annular high-performance carbon fiber prefab was put into operation in the first half of 2021, and is currently in full production. The second phase of the 650-ton carbon fiber thermal field prefab was put into operation at the beginning of this year. The company expects full production to be completed and put into operation by 2023. The third phase of the project company is expected to be completed and put into operation this year; 3) The high-performance carbon fiber composite board (Wuhu) (Tianyao): Phase I 400 tons of photovoltaic thermal field carbon /The production capacity of the carbon composite material project is gradually being released, and the development of carbon and ceramic brake discs for automobiles is being vigorously promoted.

Risk factors: raw material prices fluctuate greatly; market competition intensifies; downstream demand falls short of expectations; the company's technological breakthroughs fall short of expectations; the company's production capacity construction progress falls short of expectations.

Profit forecast, valuation and rating: The company's precision copper belt production ranked first in China. The subsidiary led the fields of carbon brake prefabricated parts, high-end thermal equipment, and expanded into fields such as photovoltaic thermal field carbon/carbon composites, 3D printing materials and components. With the gradual implementation of production capacity in various fields, the company's product sequence has been further improved, and its comprehensive strength and core competitiveness are expected to continue to improve. Given that market demand recovery has not met expectations and industry competition is intense, we lowered the company's net profit forecast for 2023-2024 to 521/796 million yuan (the original forecast was 944/1,151 million yuan), adding 975 million yuan to the 2025 forecast value, corresponding to the 2023-2025 EPS forecast of 0.39/0.60/0.73 yuan, respectively. Referring to the company's historical valuation (as of August 23, 2023, the company's average PE (TTM) for the past 3 years was 38 times, and the average value was reduced by 1 times the standard deviation 19 times), we gave the company 20 times PE in 2023, corresponding to the target price of 8 yuan, and maintained the “buy” rating.