Incident: On December 25, Chinatungsten Hi-Tech announced plans to issue shares and pay cash to purchase 100% of Hunan Shizhuyuan Nonferrous Metals Co., Ltd.; on January 9, Chinatungsten Hi-Tech announced plans to issue shares and pay cash to purchase assets and raise supporting capital and related transactions. The underlying asset transaction price has not yet been finalized, and the share issuance price is 7.05 yuan/share.

The Group fulfilled its mining injection promise. The company's transformation into a tungsten industry chain integrated industry platform company plans to acquire 100% of the shares of Minmetals Tungsten Industry and Woxi Mining (Minmetals Tungsten Industry holds 97.36% of shares and Woxi Mining holds 2.64% of shares). The announcement of this plan represents the beginning of the Group's commitment to mine injection for many years. In 2022, the company produced more than 14,000 tons of hard alloy products, and the demand for crude 65% tungsten concentrate was about 183,000 tons. Currently, the five mines managed by the company produce about 24,000 tons of tungsten concentrate, which can basically satisfy self-sufficiency after all the mines are injected.

The Shizhuyuan mine has excellent resource endowments, and the production of tungsten concentrate will increase by about 60% + Gizhuyuan Company is the largest producer of non-ferrous metals in Hunan Province, the largest domestic manufacturer of tungsten concentrate, and the largest producer and supplier of bismuth concentrate in Asia. According to the EIA, Kakizhuyuan Company has now formed a production scale of 3.5 million tons/year, mineral processing capacity of 2.3 million tons/year, tungsten concentrate equivalent to 8,000 tons/year, molybdenum concentrate equivalent to 1600 tons/year, bismuth concentrate metal content 1,600 tons/year, and fluorite concentrate dry weight of 300,000 tons/year. As of Q3 '23, Kakizhuyuan Company achieved operating revenue of 1,998 billion yuan and net profit of 395 million yuan. In May '23, the company announced the EIA for Kakizhuyuan Company's 10,000 t/d harvesting technology improvement project. The content of the technical reform was to shift the mining process from underground mining to open pit mining, and the harvesting scale was increased from the current 6,500 t/d to 10,000 t/d. According to our estimates, after the technical reform is completed, the company's tungsten concentrate production (65% off) will increase from 6292 tons to 10,278 tons, and the output will increase by 63%. The construction period of the project is expected to be 4 years. The EIA was approved in September 23, and the increase in tungsten production at Shizhuyuan Company is just around the corner.

The machine tool cycle is picking up, and the basic tool plate of the company is stable

The machine tool cycle, which is portrayed by the growth rate of machine tool production, has strongly entered the expansion range since September 23, with year-on-year data of 12.5/23.3/ 21.3%, respectively; since 23Q3, the company's core products, such as CNC blades and micro drills, have also been improving: Q3 sold about 35 million CNC blades, and sold more than 130 million pieces of micro drills, all with a month-on-month increase. The company is currently the leading domestic tungsten carbide tool enterprise. The domestic market share is close to 30%. It has built high technology, brand, customer, and scale barriers over decades of accumulation. It has a good sales capacity for end customers, and is expected to fully benefit from the increase in tool demand brought about by the upward cycle of machine tools.

Investment advice: As a leading domestic tungsten carbide enterprise, the company's performance growth momentum is strong. We expect net profit of 4.6/6.0/740 million yuan to the mother in 23-25, corresponding to current PE of 28/22/18 times, respectively, to maintain a “buy” rating.

Risk warning: Industry operating risks brought about by fierce market competition, technology research and development risks caused by uncertainty in obtaining technological results, risk of exchange rate fluctuations due to relatively high export shares, and possible implicit uncertainty in major asset restructuring.