Summary content

Populist reforms are driving growth, and the industrial pattern is concentrated in the lead. In 2022, the gross domestic product of the civilian explosion production enterprises increased by 14.28% year-on-year. The total gross domestic product of the top 20 enterprise groups in the industry in 2022 reached 29.7 billion yuan, accounting for about 76% of the total output value of the industry; the top 20 companies produced a total of nearly 800 million detonators, accounting for about 99% of the total output of the industry. Basically, they achieved the main goals in the “Opinions on Promoting High-Quality Development of the Civilian Explosion Industry” issued by the Ministry of Industry and Information Technology in November 2018. The explosion industry achieved leading concentration. The relevant output value of Cathay Pacific Group was 1,366 billion yuan, ranking 10th.

The industry has been upgraded, and sales of digital electronic lightning products have continued to rise. The Ministry of Industry and Information Technology issued the “14th Five-Year Plan” for the Safety Development of the Civilian Explosives Industry, which clearly indicates the time points for the full use of digital electronic detonators. From 2018 to 2022, the production of electronic detonators increased from 16 million to 344 million, accounting for a ratio of 1.28% to 42.73% of total production. Industrial demand is strong. In the first half of 2023, the company sold a total of 14.0241 million industrial electronic detonators, an increase of 316% over the previous year.

Going deep into the field of military manufacturing, new military materials can be expected in the future. The company obtained independent development processes for niobium tantalum alloys and tungsten-based alloys through the acquisition of companies such as Tuohong New Materials, Mitsuishi Nonferrous Metals, etc. Tantalum-niobium alloys are strategic materials in the aerospace field. They are in short supply in high-end fields. In 2022, China's external dependence on tantalum exceeds 80%; tungsten-based alloys can be used as damaging materials, and their application prospects are broad. At this stage, the average annual order for tungsten alloy materials is about 30 billion yuan, and new tungsten alloy materials account for 30% of the total volume.

Investment advice: We expect the company to achieve net profit of 313/3.87/442 million yuan in 23-25, corresponding EPS of 0.50/0.62/0.71 yuan/share, respectively. Considering the company's integrated development of civilian explosives and continued development in the field of new military materials, we gave the company 18.6 times PE in 2024, corresponding to a target price of 11.53 yuan/share, covering the first time and giving it an “increase in weight” rating.

Risk warning: the risk of macroeconomic fluctuations, the risk of increasing competition risks due to the concentrated pattern within the civilian explosion industry, the risk that the construction progress of new projects falls short of expectations, and the risk of changes in the military budget.