Matters:

The company released its 2023 annual report: The company achieved revenue of 1,026 billion yuan in 2023, down 2.73% year on year, including CNC tool revenue of 579 million yuan, down 9.98% year on year, hard alloy product revenue of 445 million yuan, up 9.98% year on year; realized net profit of 166 million yuan, down 31.43% year on year; realized net profit without return to mother of 130 million yuan, down 42.33% year on year.

Commentary:

Performance declined overall in 2023 due to macro-demand, and is expected to pick up in 2024. Affected by weak downstream demand, CNC blade production in 2023 was 107 million pieces, down 0.33% year on year, and sales volume decreased by 11.41% year on year. The decline in CNC blade sales in 2023 had a big impact on performance. As the manufacturing boom improves and downstream demand gradually picks up, CNC blade sales are expected to improve and drive performance improvement in 2024.

Volume and price: The volume price of CNC blades is expected to rise rapidly, and production capacity for new products will gradually be released. 1) Yanling base project: After the production capacity of the project was increased, the company's theoretical production capacity of CNC blades reached 130 million pieces, and on this basis, it also has a flexible space of about 20%. 2) Industrial Park Project: The company completed fixed capital raising for the construction of a CNC tool industrial park in 2022. It mainly lays out businesses such as bars, overall tools, CNC tools, and metal-ceramic blades. The revenue contribution of the new layout products in 2023 is small, and new products such as overall tools are expected to contribute significantly to 2024 performance. On the one hand, the market price of tungsten carbide, the raw material for knives, has risen, or is transmitted to tool prices. On the other hand, the price difference between domestic and foreign tools is large, and the quality of domestic knives is gradually improving, and product prices are expected to rise.

Complete package: The overall solution model continues to advance, and positive progress has been achieved. The company is committed to providing terminal customers with an integrated series of products including CNC blades, overall tools, ceramic tools, etc., as well as a full range of products and services such as intelligent tool cabinets, data management systems and on-site management, to solve the diversified product needs and one-stop processing needs of customers, focus on the terminal market and form new profit points for specialized markets.

2023Q3 won the bid for Xinchen Power's BMW crankshaft tool project, highlighting the company's overall tool solution service capabilities, and is expected to continue expanding into aerospace, 3C, wind power and other fields in the future.

Exports: Domestic knives are “good-quality and inexpensive”, and overseas exports have increased significantly. The company's overseas sales in 2017-2023 increased from 26 million yuan to 140 million yuan, with a CAGR of 32.73%. Among them, the overseas revenue of CNC tools reached 111 million yuan in 2023, with an average price of 10.10 yuan. With the advantage of “good quality and low price”, overseas business has achieved rapid growth. There have been new breakthroughs in adding overseas brand agents, increasing the number of overseas customers, and overseas distribution sales in Europe and the US. Overseas business growth can be expected in 2024.

Investment advice: Considering that the manufacturing boom falls short of expectations, we lowered the company's revenue and profit expectations. The company's revenue for 2024-2026 is 12.84 (previous value 15.68), 15.54 (previous value 20.23), and 1,887 billion yuan, respectively, and net profit to mother is 2.25 (previous value 3.84), 3.14 (previous value 4.93), and 441 million yuan, respectively. The corresponding EPS is 1.41, 1.98, and 2.78 billion yuan, respectively. Referring to the valuation level of comparable companies, based on factors such as the company's leading domestic tool private enterprise, positive progress in domestic and overseas business and overall solution models, the gradual release of production capacity in fixed increase projects, and the improvement in manufacturing sentiment, the target price was adjusted to 32.43 yuan, maintaining a “strong push” rating.

Risk warning: The recovery of the manufacturing boom fell short of expectations; the expansion of production fell short of expectations; the expansion of new industries and overseas markets fell short of expectations.