Henggong Precision's main products are continuous cast iron parts and precision machined parts. The company is one of the few high-tech enterprises that have mastered the core technology of continuous cast iron and can provide one-stop service for the manufacture of core equipment components. The company leads the continuous casting technology industry. The downstream application field of continuous iron castings continues to expand, and the market is entering an incremental stage; the company has pioneered the field of robotics and achieved technological breakthroughs, and reducers have begun to be supplied in small quantities.

Industry level: Ductile iron has significant advantages, with the future of iron instead of steel 1) Material advantages: Compared with forged steel, ductile iron has low cost, light weight, low temperature rise, easy to cut, and less wear on tools. It can effectively avoid the impact of burrs on automated production, and the processing efficiency is higher.

2) The application field of ductile iron continues to expand, and the market space continues to expand ① Ductile iron is now used in processing parts of pneumatic, hydraulic, transmission systems, etc., and the product form needs to be expanded. Under continuous casting technology, most of the sections of ductile iron profiles are round or square. At this stage, they are mostly used to make components with relatively simple shapes such as hydraulic valve blocks, screw rotors, etc. In the future, by continuously improving the continuous casting process, ductile iron is expected to produce processed parts with a high degree of specialization.

② Continuous casting technology improves the production efficiency of ductile iron, and the continuous casting ductile iron market continues to expand. In 2014-2021, China's ductile iron production continued to increase. It gradually increased from 12.4 million tons to 15.95 million tons, accounting for 26.84% to 29.51% of the country's total castings. Continuous casting technology has high production efficiency and can produce large quantities of profiles at the same time. The continuous casting ductile iron market is expected to continue to expand in the future.

③ Domestic Henggong Precision takes the lead, and overseas peers are rich in application scenarios worth learning from. Domestically, Henggong precision technology and production capacity have advantages. Overseas, in addition to being deeply involved in the field of traditional equipment, ductile iron companies have also expanded into fields such as natural gas storage and transportation and marine corrosion protection. The rich application scenarios of overseas ductile iron have broadened the development path for domestic enterprises.

3) The robot opens the space for ductile iron to grow. ① Taking advantage of the development of robots, various leading reducer manufacturers are actively seeking core materials with lower costs and better performance in order to obtain cost advantages and seize market share. ② The advantages of ductile iron, such as low cost, light weight, and low temperature rise, naturally meet the requirements of robot core components for basic materials. It has now become a new material that various reducer manufacturers focus on, and the market space is broad. Currently, ductile iron supplied by Henggong Precision has been used for components such as planetary mounts, planetary covers, cycloid wheels, pintooth shells, eccentric shafts, etc. of RV reducers. Foreign speed reducer manufacturers already use ductile iron as the raw material for steel wheels in harmonic reducers.

Company level: “Two-wheel drive” increases revenue, uses Dongfeng robots to open up new fields 1) Two-wheel collaboration drives performance growth.

① Continuous casting business: The continuous casting technology is leading in the industry, and the continuous casting production is the highest in China. Through years of improvement and development of continuous casting technology, the company has now achieved near-defect-free casting of large-volume ductile iron, greatly improving product quality and yield. The domestic market share of the company's continuous casting production in 2021 was 59.42%.

② Machine processing business: High value-added business has significant benefits. In 2018-2022, the company's machining business revenue share increased from 50.58% to 57%. The machining business has high added value, and the gross margin remains around 30% year-round. As domestic replacement demand for high-end parts continues to grow, the machined parts business with high added value and high gross margin has brought the company a wider incremental market and room for growth.

③ After many years, the company has now opened up all aspects of the equipment manufacturing industry chain to meet the customer's “one-stop procurement” needs: through the supply of high-quality continuous cast iron, the company has reduced the comprehensive cost of the processing side; through “one-stop” deep processing services, it has opened up more application areas and formed a high customer viscosity.

2) Develop a new robot circuit, and the scale of application of ductile iron in the reducer market can be expected.

The characteristics of ductile iron such as low cost, light weight, and low temperature rise make it meet the core demands of robot components in terms of cost reduction, weight reduction, and heat dissipation. The company actively lays out speed reducer tracks. Currently, it has been used on a small scale on components such as planetary mounts, planetary frames, cycloids, pintooth shells, and eccentric shafts of RV reducers. It has a first-mover advantage and is expected to gain a large market share in the future. We estimate that the total global robot market for ductile iron is expected to reach 10.935 billion yuan in 2030, of which ductile iron is expected to reach 5,072 billion yuan in the humanoid robot market and 5.862 billion yuan in the industrial robot market.

First coverage, giving a “buy” rating: According to the business split and profit forecasting model, we expect the company's revenue to be 10.03/11.87/1,404 billion yuan in 2023-2025, and net profit to mother of 1.21/1.54 billion yuan, respectively. The current stock price corresponding to PE is 36.9/28.9/24.4 times, respectively. The company's growth is driven by technology. We are optimistic that the company will accelerate the release of performance in the future, driven by continuous cast iron, precision machined parts, and precision speed reducers, and give it a “buy” rating.

Risk warning: risk of developing new products and technologies falling short of expectations; risk of production capacity release falling short of expectations; risk of large price fluctuations in the industrial chain; risk of untimely updating of information used in research reports; risk of deviations in industry size estimates, etc.