Event Overview: 2023H1, the company achieved revenue of 3,709 million yuan, +9.81% year-on-year; net profit of 381 million yuan, +5.46% of the same period; net profit of 356 million yuan after deducting non-attributable net profit of 356 million yuan, +3.91% year-on-year. At 2023Q2, the company achieved revenue of 1,834 million yuan, +2.24% year on month, -2.16% month on month; net profit of 244 million yuan, +45.63% year on year and +78.35% month on month; net profit of non-return net profit of 224 million yuan after deducting net profit of 224 million yuan, +51.52% year on year and +70.13% month on month.

Comment: Export volume of titanium materials, record high performance in Q2

1. Volume: 23Q2 The sales volume of titanium products declined slightly. The sales volume of 2023H1 titanium products was 16687.43 tons, +3.7% year-on-year.

Production was 16893.48 tons, +4.03% year on year. On a quarterly basis, 23Q2's titanium product sales volume was 8342.92 tons, -0.91% year on year, -0.02% month on month, output was 9174.63 tons, +3.97% year on year, and +18.86% month on month.

Considering that domestic titanium for civilian use and titanium for military use is relatively sluggish, we estimate that the company's titanium exports have increased markedly. This is the main reason why its performance exceeded expectations.

2. Price: 23Q2 The gross margin of titanium products has risen sharply. According to estimates, the company's 23H1 titanium products sold for 206,200 yuan/ton, +8.05% year-on-year, but the domestic titanium plate market price was low during the same period. The price of 23H1 domestic titanium plate market was -9.82% over the same period. It is expected that the share of high-end titanium materials such as exports will increase significantly. Aviation titanium exports rose in 2022, and the company's titanium exports accounted for 18.82%. Looking at the quarterly basis, it is estimated that the gross profit margin of 23Q2 titanium products is 27.29%, +2.57 pct year on year, and +8.16 pct over the previous year. It is expected that the delivery of high-end products in the first half of the year will mainly be carried out in the second quarter. In terms of gross margin, driven by titanium products, 23Q2 gross margin was 26.76%, up 2.68 pct from the previous year and +8.22 pct from the previous year.

3. Baotai Huashen: Continued release of titanium sponge. The subsidiary Baotai Huashen continued to release 12,000 tons of titanium sponge production capacity. 23H1 achieved revenue of 756 million yuan, +47.22% year-on-year, and net profit of 165 million yuan, or +23.23% year-on-year.

Core highlights: High-end titanium production capacity is put into production, and the product structure is expected to be further optimized 1. High-end titanium projects are gradually put into production, and the titanium product structure continues to be optimized. The high-end titanium project that the company initially planned to raise and invest in 2021 has completed more than 95% of the total project volume, and is expected to be put into use in October '23. (1) The space-grade wide-width titanium alloy sheet and foil project includes 1500 tons/year of sheet, 5,000 tons/year of titanium strip, and 500 tons/year of foil; (2) high-quality titanium ingots, pipes and profiles projects include 10,000 tons/year of titanium ingots, 290 tons/year of pipes, and 100 tons/year of titanium alloy profiles; with the gradual commissioning of the titanium project, the company's titanium product structure will be further optimized.

2. The company is a leading titanium company in China, and the “14th Five-Year Plan” plan is to become a strong enterprise in the international titanium industry. The company is one of the main suppliers of titanium for domestic and export aerospace. The company's actual production capacity of titanium processing materials reached 34,214 tons in 2022. The company's “14th Five-Year Plan” development strategy plans to reach a production capacity of 50,000 tons of titanium products, which is expected to become a strong enterprise in the international titanium industry.

3. Titanium sponge production expanded, and the company's raw material self-sufficiency rate increased. The Baotai Huashen sponge expansion project with an annual output of 12,000 tons was gradually put into operation. The company's raw material self-sufficiency rate increased to ensure the company's supply of raw materials.

Investment suggestions: Benefiting from developments in aerospace and other fields, the demand for titanium is broad. With the launch of high-end titanium projects, the company's performance can be expected to be released. We expect the company's net profit to be 739/9.49/1,192 million yuan respectively in 2023-2025. Corresponding to current prices, PE 2023-2025 will be 20/16/13 times in sequence, maintaining the “recommended” rating.

Risk warning: the risk of the project falling short of expectations, the risk of fluctuations in raw material prices, the risk of market competition, etc.