Event: The company released its 2023 annual report. In 2023, the company achieved operating income of 4.159 billion yuan, a year-on-year decrease of 1.62%, a year-on-year net profit of 752 million yuan, a year-on-year decrease of 30.33%, and net profit after deducting non-return to mother of 631 million yuan, a year-on-year decrease of 35.06%. Looking at the single quarter, with 2023Q4, the company achieved operating income of 1,071 million yuan, an increase of 9.68% over the previous year; realized net profit of 170 million yuan, an increase of 5.17% from the previous month and a decrease of 23.37% from the previous year; and realized net profit without return to mother of 119 million yuan, a decrease of 15.15% over the previous year and a decrease of 34.82% year on year. By product, in 2023, titanium alloys achieved revenue of 2.05 billion yuan, a year-on-year decrease of 21.96%, superconducting products achieved revenue of 985 million yuan, an increase of 57.94% year-on-year, and superalloys achieved revenue of 474 million yuan, an increase of 161.79% year-on-year.

Volume: Weak military demand led to a year-on-year decline in titanium alloy sales, and the expansion of industrial applications combined with downstream verification successfully promoted rapid year-on-year growth in sales of superconducting products and superalloys. In 2023, the company's titanium alloy production was about 10,695.61 tons, up 15.05% year on year, sales volume was about 7259.60 tons, down 15.63% year on year; superconducting product output was about 1730.10 tons, up 69.84% year on year, sales volume was about 1769.41 tons, up 59.37% year on year; high temperature alloy production was about 2280.46 tons, up 95.29% year on year, and sales volume was about 1660.24 tons, up 126.68% year on year.

Price: The decline in demand for military products led to a year-on-year decline in the profit of titanium alloys. The decline in raw material prices combined with the starting supply drive rapid growth in profits of superconducting products and superalloys. The company's gross margin in 2023 was 31.87%, down 7.58 pcts year on year; 2023Q4, the company's gross margin was 28.05%, down 7.12 pcts month on month, down 7.82 pct year on year. By product gross margin, in 2023, the gross margins of the company's titanium alloy, superconducting products and superalloy products were 34.41%, 34.39% and 15.86% respectively, with year-on-year changes of -8.88pct, +3.95pct and +12.57% respectively. The gross profit share also changed from 83.32%, 11.38%, and 0.36% in 2022 to 65.02%, 25.54% and 5.68% in 2023. Looking at the price of raw materials, in 2023, the average price of titanium sponge was about 63,900 yuan/ton, down 18.69% year on year; the average price of titanium plate was 100.83 yuan/kg, down 16.54% year on year; the average closing price of nickel futures was 168,300 yuan/ton, down 12.89% year on year.

Core highlights: Applications in the superconducting industry are expanding, and superalloys are gradually being released. 1) The superconducting product market is developing smoothly, and the company continues to develop superconducting materials and magnet technology for applications in semiconductors, photovoltaics, medicine and electricity, and is expected to continue to expand; 2) The company has obtained supply qualifications for high-temperature alloy materials for many key models of aero engines and gas turbines and has begun batch supply. As production capacity is gradually released in the future, the contribution of superalloys to superalloy performance is expected to gradually increase. 3) The fixed increase project will add superalloy+titanium alloy materials. The total production capacity of titanium alloy will reach 10,000 tons, and the superalloy production capacity will reach 6,000 tons. Growth is expected to reach another level.

Investment advice: The company has a stable dominant position in the high-end titanium alloy supply market in the domestic aviation sector. At the same time, market development for superconducting products and superalloy applications and downstream customer verification have successfully achieved mass supply. With the commissioning of fund-raising projects, production capacity can be further expanded, and future growth can be expected. We expect that in 2024-2026, the company's net profit will be 796, 9.79 billion yuan, and the PE corresponding to the March 29 stock price will be 30/24/19X, respectively, maintaining the “recommended” rating.

Risk warning: downstream demand falls short of expectations; risk of raw material price fluctuations; project progress falls short of expectations.