For the first time, we covered the core supplier of “aero engine and gas turbine” hot-end components: Wanze Co., Ltd. (000534.SZ), and gave it a “recommended” rating. The main reasons are as follows:
It has been continuously optimized for a long time; new materials have been honed for ten years and have entered a period of performance realization. 1) In the pharmaceutical sector, in 2019, the company restructured and placed pharmaceutical assets to achieve transformation in the real estate business. Its subsidiary Inner Mongolia Shuangqi is a leading domestic enterprise focusing on digestive and gynecological microecosystems, and its products have high market popularity and share in the segment. The pharmaceutical business guarantee company has a good cash flow from 2019 to 2022; 2) In the field of new materials, in 2013, the company strategically cooperated with Central South University to enter the superalloy and its products circuit. Since then, it has introduced a number of cutting-edge industry experts and insisted on R&D investment for ten years, forming an integrated industry-research pattern with the Zhongnan Research Institute as the R&D center and Shenshan Wanze and Shanghai Wanze as the main production bases. It has now grown into a “two-machine” core supplier of hot end components.
Continued high R&D investment and deep accumulation, and active production preparation to meet strong downstream demand. 1) The “two machines” hot end are in poor working condition, have extremely high requirements on materials and processes, and have very high barriers. Since 2019, the company has continued to invest heavily in R&D in the field of superalloys, with an R&D investment of 122 million yuan in 2022 accounting for 68% of the current superalloy business revenue. 2) After long-term investment in R&D and industrialization, the company's capacity building results were remarkable. Shanghai Wanze first entered mass production in the field of civilian blades in 2020. As of 1H23, it had received 312 new products under development, of which 69 had been developed and transferred to production; at the same time, Shenzhen Wanze completed the first phase of the production expansion plan at 1H23. In 2022, Zhongnan Research Institute (a subsidiary of Changsha Precision Casting) will enter mass production. 3) According to our estimates, China's aero engine casting blade market in 2022 is nearly 10 billion yuan. According to Acumen's statistical forecast, the global aero engine blade market will reach US$31 billion in 2022, of which the turbine blade market will reach US$14.4 billion, and the industry's growth ceiling is high.
Expense control capabilities have improved rapidly; incentives for majority shareholders to increase holdings/repurchase/share rights demonstrate long-term confidence. 1) The company's expense ratio fell from 82.4% to 62% during the period from 2019 to 2022, and the ability to control expenses was enhanced. As new materials enter the harvest period, the net interest rate inflection point is expected to arrive. 2) On August 25, 2023, the company announced that the actual controlling shareholder Wanze Group will increase the company's holdings by 80 to 160 million yuan; on August 28, 2023, the company announced that it will use 150 to 300 million yuan to repurchase the company's shares for share incentive plans or employee ownership plans, and increase the repurchase amount to 250 to 500 million yuan on December 28; in addition, from 2020 to 2023, the company will implement a total of three equity incentive plans to fully stimulate talent vitality. “Three arrows in one go” shows the company's confidence in long-term development.
Investment advice: The company has continuously optimized its business layout, and has become a leading pharmaceutical microecological bacteria leader in China, and has accumulated wealth in the field of superalloys and products. After ten years of refinement, it has grown into a core supplier of “two-engine” hot-end components. Production and research capabilities for master alloys, cast blades, and powder turbines are scarce. We believe that with the rapid development of engines (special and commercial) and the increase in demand for combustion engines, the company is facing better development opportunities. The company is expected to achieve net profit of 170 million yuan, 290 million yuan, and 4.4 billion yuan respectively from 2023 to 2025. The corresponding PE is 37x/22x/14x, respectively, covered for the first time, and given a “recommended” rating.
Risk warning: downstream demand falls short of expectations; model mass production progress falls short of expectations; product price reduction, etc.