H23 results slightly miss our expectations
Tiangong International announced its 1H23 results: Revenue fell 6.5% YoY and grew 4.2% HoH to Rmb2.50bn, and attributable net profit dropped 25.9% YoY and grew 3.7% HoH to Rmb219mn, slightly missing our expectations. However, its earnings still show resilience.
Overall product sales volume declined due to sluggish demand; titanium alloy sales volume increased despite headwinds. In 1H23, the firm's sales volume of die steel (DS), high-speed steel (HSS), and precision cutting tools dropped 18.7%, 34.1%, and 20.3% YoY to 663mn units, 68mn units, and 94mn units due to lackluster demand from domestic manufacturing industries. Sales volume of titanium alloy increased 24.7% YoY to 2,400t in 1H23.
GM edged down due to rising product prices. In 1H23, unit selling prices of DS, HSS, titanium alloy, and precision cutting tools rose about 1.7ppt, 8.9ppt, 125.0ppt, and 34.0% YoY to Rmb17,000/t, 56,000/t, 192,000/t, and Rmb4.8/unit. As rising raw material prices and weak domestic demand weighed on cost pass-through, GM of the firm's HSS, DS, and precision cutting tools businesses fell 6.7ppt, 5.1ppt, and 3.9ppt YoY to 17.6%, 16.4%, and 24.6% in 1H23. GM of titanium alloys increased 11ppt YoY to 31.2% in 1H23. We attribute the sharp increase in GM of titanium alloys to product mix adjustment and higher proportion of high- value-added computer, communication, and consumer electronics (3C) products.
Operating cash flow improved and FX gains surged. The firm's operating cash flow rose Rmb360mn YoY to Rmb154mn in 1H23. Its FX gains rose Rmb27mn YoY to Rmb66mn in 1H23, mainly due to appreciation of the US dollar and the euro.
Trends to watch
Premiumization strategy well on track; strong endogenous growth momentum. The firm continues to optimize its product mix structure amid its premiumization strategy. Despite weak domestic demand, the firm's sales volume of powder metallurgical products rose 200t YoY to 556t in 1H23. We expect its full-year sales volume to reach 1,500t.
As titanium alloy gains greater popularity in fields such as 3C, eyeglasses, 3D printers, and aerospace, and we expect sales volume of the firm's titanium alloy products to increase. We believe the firm's titanium alloy production capacity will reach 13,000t after its 3,000t/yr project commences operation in 2024. We also expect its product mix of titanium alloy to continue to improve.
The firm is strengthening its presence in the field of high-end cutting tools, and the construction of production lines for cemented carbide cutting tools and powder metallurgy tap is on track. The performance of its powder metallurgy taps and drill bits is improving. The firm's 7,000t/yr high-speed forging machine construction project has been officially completed, laying a solid foundation for its development of the integrated DS business. We expect the project to generate considerable profit in 2024.
Expecting recovery; earnings and valuation to improve in 2H23.
Considering that the destocking cycle of domestic manufacturing industries is near an end, we expect downstream demand to recover in 2H23. As sales volume of its high-end products ramps up, we expect the firm to see significant earnings recovery and Davis Double Play in 2H23.
Financials and valuation
As the recovery in downstream demand was slower than we expected, we lower our 2023 attributable net profit forecast by 23.9% to Rmb693mn. We raise our 2024 attributable net profit forecast by 1.7% to Rmb1.18bn due to the sales ramp-up of high-end products. The stock is trading at 9.1x 2023e and 5.1x 2024e P/E. We maintain an OUTPERFORM rating and our TP of HK$4.21, implying 16.8x 2023e and 9.8x 2024e P/E with 67% upside.
Risks
Alloy material prices plunge; macroeconomic growth slows.