Event: On April 10, the company released its 2023 annual report. For the whole year, the company achieved revenue of 1,026 million yuan, yoy -2.73%; net profit attributable to mother was 166 million yuan, yoy -31.43%; net profit after deducting non-return to mother was 130 million yuan, yoy -42.33%. In Q4, the company achieved revenue of 221.80 million yuan, yoy -13.27%; net profit to mother of 6.43 million yuan, yoy -88.00%; net profit after deducting non-return to mother -1.33 million yuan, yoy -102.26%.

There was a slight decline on the revenue side, and the product structure changed greatly. The company's revenue for the full year of 2023 fell 2.73% year on year, mainly due to market demand, which led to a slight decline in revenue.

By product, the company's product structure has changed greatly. ① The revenue share of CNC tool products decreased: In 2023, the company's CNC tool products achieved revenue of 579 million yuan, yoy -9.98%, accounting for 56.36% of revenue, and gross margin of 40.42% (year-on-year decrease of 7.10pct); of these, CNC blade sales volume was 87.717 million pieces, yoy -11.41%.

② Increased revenue share of hard alloy products: In 2023, the company's hard alloy products achieved operating income of 445 million yuan, yoy +9.98%, accounting for 43.40% of revenue, gross margin of 14.93% (down 5.30pct year on year), sales volume of 1380.63 tons. Yoy +15.53%. Looking at the regional level, the overseas revenue growth rate is impressive. ① Domestic market: In 2023, the company achieved revenue of 884 million yuan in the domestic market, yoy -6.09%, and gross profit margin of 27.85% (a year-on-year decrease of 9.08pct). ② Overseas markets:

In 2023, the company seized export opportunities and increased overseas development efforts. Overseas brand agents continued to increase, and the overseas layout was further improved. The annual overseas market revenue achieved revenue of 140 million yuan, yoy +31.44%, and a gross profit margin of 38.64% (up 1.33pct year on year). Among them, the export revenue of CNC tool products reached 111 million yuan, exports of CNC tool products accounted for 19.27% of CNC tool revenue, and the average export unit price of CNC tool products was 10.10 yuan, and some overseas customers in Asia, Europe and the US doubled.

The company's profitability fluctuated. In 2023, the company achieved a gross sales margin of 29.32%, a year-on-year decrease of 7.43pct; the net sales margin was 16.17%, a year-on-year decrease of 6.77pct. The company's cost rate for the period was 14.33%, up 2.89pct year on year. Among them, the sales expense ratio was 4.20%, up 2.03 pct year on year, mainly due to year-end bonus payments in cash, an increase of marketing expenses and business hospitality; the management fee ratio was 3.58%, a decrease of 0.90 pct year on year; the R&D expense ratio was 6.22%, an increase of 1.20 pct year on year, mainly due to the increase in R&D personnel remuneration; the financial expense ratio was 0.32%, up 0.57 pct year on year, mainly due to the increase in interest expenses in the current period.

Increase investment in R&D, focus on high-end tool import substitution, and improve the product range. In 2023, the company achieved breakthroughs in many R&D projects, further consolidating the company's core competitiveness, applying for 41 new patents and adding 14 new authorized patents. The company insists on product innovation, continuously optimizes production processes, and increases efforts to develop new products. By improving the product matrix of CNC blades, CNC tools, overall tools, metal ceramics and superhard tools, the company upgraded material grades, product technology, and tool design, and accelerated the import substitution of high-end tools. The company has gradually improved product packages in key application areas and developed supporting products for applications in aerospace, rail transit, wind power generation, automobile molds, etc.

Dive deep into the terminal market and upgrade the company's business model. The company actively explores the downstream terminal market, focuses on high-quality customers, and deepens terminal needs. (1) CNC tool stores gradually cover terminal customers within the region, and the regional technical service team is gradually improved, while optimizing channel inventory, strengthening the price control of brand products, and consolidating the company's product market position; (2) to carry out on-site customer tool management and technical services by setting up intelligent tool cabinets, tool life monitoring software, and introducing standardized management models, etc., they have established full-package service cooperation with many customers and formed new profit points through business model innovation; (3) Accelerate the development of tool package solutions for key customers and key scenarios, and obtain and establish BMW crankshaft processing projects The benchmark case for tool processing solutions in the automotive industry chain has formed a standard solution system in the fields of automobiles, 3C, aerospace, wind power, medical devices, etc., and has entered the batch promotion and replication stage.

Investment advice: Adjust the company's profit forecast based on the 2023 annual report results. The company's revenue for 2024-2026 is estimated to be 12.86 billion yuan, 15.38, 1,809 billion yuan, yoy +25.3%, +19.5%, and 17.7%; net profit to mother of 2.10, 2.64, 333 million yuan, yoy +26.2%, +26.2%, respectively; corresponding PE is 16.58, 13.17, and 10.44X, respectively. The valuation is cost-effective and maintains a “buy” rating.

Risk warning: The recovery in the manufacturing industry fell short of expectations, industry demand fell short of expectations; production capacity climbed short of expectations; production capacity investment in fixed growth projects fell short of expectations; overseas market development was blocked, and promotion of new products was blocked.