Niche (niche) refers to a market segmented according to the advantages of an enterprise. The market products are highly targeted and specialized. A niche market refers to a “niche market,” also known as a “niche market.” It targets a smaller customer base that has been overlooked or segmented. Although this part of the market is small, traditional products cannot meet this kind of demand, and there are plenty of market opportunities.
Henggong Precision's main products are continuous cast ductile iron and precision machined parts produced using continuous cast ductile iron. It is one of the few high-tech enterprises that have mastered the core technology of continuous cast ductile iron and can provide one-stop service for core components.
Continuous cast ductile iron is a typical niche market. Its characteristics include: 1) Niche market: The annual domestic production of ductile iron in 2021 is currently about 225,000 tons, while domestic steel production reached 1.03 billion tons during the same period. The current market size of continuous cast ductile iron is small. 2) Specialized requirements: Continuous cast ductile iron is mainly used in pneumatic, hydraulic and other parts with high requirements for quality, hardness and wear resistance, such as screw rotors in compressors, hydraulic valve blocks and guide sleeves for injection molding machines. 3) Highly customized: Components such as screws and rotors in the pneumatic industry need to be customized with specific shapes, hardness and strength according to the requirements of different working environments and working conditions.
Compared with forged steel, the advantages of continuous cast ductile iron include: 1) low cost: 30% lower than forged steel; 2) weight reduction: continuous cast iron density is 8% lighter than forged steel, reducing material costs per unit volume; 3) low temperature rise: ductile iron has good self-lubricating properties, excellent wear reduction performance, and extended life; 4) good cutting performance: tool savings of 45%-60%.
Judging from the principle of technology first, continuous cast ductile iron has many advantages. At this stage, it is in a “niche market”, and the reason for this is “process rigidity.” “Process rigidity” refers to the phenomenon of industrial product manufacturing, where once the production process runs through, once it changes, it faces huge resistance. Similar to the resistance of employees to lower wages in the economic concept of “wage rigidity,” the resistance of process rigidity stems from material changes leading to adjustments and replacements of related processes, equipment, personnel, production lines, etc.
Henggong Precision's three sharp swords break process rigidity: 1) The manufacturing boom cycle is declining, forcing the supply side to cut costs. Overcapacity and homogenization on the supply side of the manufacturing industry are severe, compounded by weakness on the demand side, and downstream enterprises are strongly demanding to maintain profits by reducing costs. The cost of continuous casting ductile iron is low, which is in line with the manufacturing industry's demand for cost reduction. 2) The new form of “integrated” service breaks the application impasse. Through the supply of high-quality continuous cast ductile iron, the company has reduced the overall cost of processing; through “one-stop” deep processing services, it has opened up more application fields and formed high customer viscosity. 3) ADI establishes a new level of material iteration. ADI is a new type of material formed by isothermal hardening of ductile iron after austenization. It is a high-end product of ductile iron. It has the advantages of low cost, light weight, high strength and hardness, and good toughness, which further opens up market space for ductile iron applications.
Why can Henggong Precision become an industrial giant?
1) Industrial status: The production of ductile iron in continuous casting is number one in China. ① Company technology is scarce. The company effectively controls the graphite spheroidization rate of cast iron by controlling the feed ratio, drawing speed and cooling speed, etc., to achieve the ideal graphite spheroidization rate and uniformity, and achieve nearly defect-free casting of large-volume ductile iron parts. ② In 2021, the company produced 134,000 tons of continuous cast ductile iron, accounting for 60% of the domestic market in 2021. ③ In 2015, the company's products were extended downstream to the production of precision machined parts. ④ Customers include well-known domestic and foreign companies such as Hanzhong Precision Machinery, East Asia Machinery, Haitian Group, and Atlas Copco.
2) Financial analysis: The “ratchet effect” of revenue is prominent, and profitability is steady. ① The increase in revenue from pneumatic, hydraulic, and continuous castings helped the company's performance to stabilize and stabilize, and the “ratchet effect” of the company's revenue was outstanding. ② In recent years, the company's net profit margin has been steady, operating capacity has been steady, and net operating cash flow has been steady, moderate and positive.
3) Product Strategy: ① The company's continuous cast ductile iron is now used in the fields of air pressure, hydraulic pressure, transmission, speed reducer, etc., adding a wide range of new market space. ② The company actively lays out speed reducer tracks. The company achieved technological breakthroughs in the RV reducer series components and supplied them in small quantities. At present, the company's technical team has achieved technical breakthroughs in the core components of the RV reducer: planetary frame, planetary frame cover, cycloid wheel, needle tooth shell, eccentric shaft, etc., using ductile iron materials and beginning small-batch supply. ③ The new product ADI expands new boundaries of materials and opens up the blue ocean market. ④ New production capacity establishes an “integrated” service strategy. The company opens up all manufacturing links in the equipment manufacturing industry chain from “raw materials” to “precision parts” to meet the “one-stop procurement” needs of customers. The gross margin of the machining business remains above 25% all year round, and its share of revenue is increasing year by year.
Maintaining a “buy” rating: According to the business split and profit forecasting models, we expect the company's operating income in 2023-2025 to be $10.03/11.87/1.404 billion yuan, and net profit to mother of $1.21/1.54/183 million, respectively. The PE corresponding to the current stock price is 32.7/25.6/21.7 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 the continuous cast iron, precision machined parts, and precision reducer business, and maintain 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.