Incident: After the February 26 market, the company announced that it intended to raise no more than 200 million yuan in additional capital from the actual controller.

The actual controller subscribed for the full amount of this fixed increase in cash, demonstrating confidence in the long-term development of the company. The company plans to issue no more than 200 million yuan in targeted increases to the actual controller, chairman, and general manager Mr. Xiao Xukai to supplement working capital and repay loans. The offering price is 45.09 yuan/share, and the lock-up period is 36 months from the end of the offering. As of 2024-2-26, the company's actual controllers (Xiao Xukai, Wang Yuqin, Gao Ying) held a total of 38.75% of the company's shares. After this offering, the company's share structure was further concentrated on actual controllers. This increase has helped ease the cash flow pressure brought about by the company's continuous expansion of production capacity in recent years, further improving the company's ability to borrow and repay debts, and demonstrating the confidence of actual controllers in the company's long-term positive development trend.

In 2023, revenue was 800 million yuan, up 32% year on year; net profit to mother was 160 million yuan, down 5% year on year. In 2023, the company achieved revenue of 794 million yuan, up 32.02% year on year; net profit to mother was 158 million yuan, down 5% year on year; net profit from non-return to mother was 149 million yuan, down 5.39% year on year. We believe that the continued increase in revenue in 2023 is mainly due to the company continuing to increase investment in R&D, strengthen internal management, actively explore the market, promote the implementation of new production capacity, increase in product supply capacity, increase in production and sales volume over year, and steady growth in various businesses. The decline in profit in 2023 was mainly due to equity payments, interest expenses on convertible bonds, and higher fixed costs of overall tool production capacity climbing.

Product upgrade+channel construction is expected to accelerate domestic substitution and overseas expansion, and profitability will further enhance product upgrades: new metal-ceramic blades, hardening tools, and CNC tools added to the IPO and convertible debt projects will further broaden the product matrix. In 2022, the company produced about 93.35 million blades, and sold about 9.05 million pieces, up about 17% and 9% year-on-year respectively. The unit price of the blade was about 6.6 yuan/piece, an increase of about 12% over the previous year. With the gradual commissioning of the fund-raising project in 2023, the profitability of the company's CNC tools is expected to continue to increase.

Channel construction: 1) Direct sales distribution channel: Distribution revenue accounted for about 87% in the first half of 2023. With the strength of direct sales team building and the development of direct sales customers, the proportion of direct sales is expected to increase in the future. 2) Overseas sales: Overseas sales in the first half of 2023 were about 16.1 million yuan, up about 43% year on year, accounting for about 4.5% of total revenue, up about 0.6 pct year on year. Currently, the quality of some products has reached or even surpassed that of Japanese and Korean manufacturers. The cost performance advantage is expected to speed up domestic replacement of the company's products and overseas expansion.

Profit forecasting and valuation

The company's net profit from 2024-2025 is estimated to be about 230 million yuan and 310 million yuan, respectively, up 46% and 36% year-on-year, and PE is 17 and 13X, maintaining a “buy” rating.

Risk warning

1) Downstream application demand falls short of expectations; 2) Production expansion progress falls short of expectations.