Incident: The company released its 2023 annual report, achieving full year revenue of 4.159 billion yuan (-1.62%) and net profit of 752 million yuan (-30.33%).

Revenue and gross margin of titanium alloys declined, and superconducting and superalloys increased dramatically. By business, the company's titanium alloy revenue in '23 was 2.05 billion yuan (-21.96%), with a gross profit margin of 34.41% (-8.88pct); superconducting product revenue of 985 million yuan (+57.94%), gross profit margin of 34.39% (+3.95pct); superalloy revenue of 474 million yuan (+161.79%), gross profit margin of 15.86% (+12.57pct). The company's annual sales volume of titanium alloy was 7,260 tons (-15.63%), which was less than on the revenue side, indicating that the decline in sales volume in 23 was due to high-priced titanium alloys. The decline in gross margin may also be due to the decline in the share of high-priced titanium alloys. Revenue and gross margin of superconducting products have increased dramatically, mainly driven by demand for MRI instrument wires, nuclear fusion CRAFT projects, and technology upgrades for monocrystalline silicon magnetic-controlled direct drawing preparation technology. The sharp increase in superalloy revenue and gross margin is mainly due to the fact that some grades have passed type certification and entered the release stage. The cost rate of 14.45% (+2.75pct) over the 23-year period was mainly due to a large increase in R&D expenses (raw materials, external processing, testing fees, etc.), with a net interest rate of 18.38% (-7.53pct)

Inventories and ongoing construction increased dramatically. The company's inventory at the end of the period was 3.342 billion yuan (+40.43%), mainly due to the expansion of the company's production scale of superalloys and superconducting products during the reporting period, increasing production volume, and preparing titanium alloys ahead of time according to market conditions. At the end of the period, construction of 536 million yuan (+142.75%) was mainly due to the fact that the company began installation and commissioning after the equipment purchased arrived during the reporting period and successive investment in the plant under construction.

Projects and inventory reserves are abundant, waiting for industry demand to recover. Company 1) Titanium alloy during the reporting period: Remarkable progress has been made in the field of dual aircraft and has obtained supply qualifications for multiple models; at the same time, breakthroughs have been made in the development of TiAl high-purity melting technology. 2) Superconducting products: Continuous development of high-temperature superconducting Bi-2212 wire and Bi-2223 strip preparation technology, with comprehensive performance reaching the international advanced level; developing special low-loss superconducting wires to meet new needs in the field of wind power. 3) Superalloy: It has broken through the full-process preparation technology for high-strength steel bars and small-sized bars for fasteners; the self-developed HT700 supercritical coal-fired power plant has basically completed the engineering application assessment of the 650℃ ultra-supercritical coal-fired power plant; the construction of a superalloy recycling production line is progressing smoothly.

Considering fluctuations in downstream demand, we adjusted the company's sales expectations for titanium alloy and other products, and forecast earnings per share for 2024-2025 to be 1.62 and 2.19 yuan (previous values were 1.93 and 2.53), respectively, and an additional 26-year EPS of 2.93 yuan. According to comparable companies, a 24-year price-earnings ratio of 30 times, corresponding to a target price of 48.6 yuan, maintaining the purchase rating.

Risk warning

Industry demand falls short of expectations; risk of falling product prices