Incident: Company discloses 2023 annual report. The company achieved annual revenue of 3.4 billion yuan, +6.15% year over year; realized net profit of 144 million yuan, -29.21% year over year; realized net profit of 135 million yuan, -20.41% year over year, mainly due to losses caused by the wholly-owned subsidiary Aucetai, a decline in market prices for bar products, and gross profit was not fully released, leading to inventory impairment; and sales expenses increased dramatically due to market development; annual losses of 487.5539 million yuan. The company achieved revenue of 882 million yuan in a single quarter of 2023Q4, +26.5% year-on-year, and achieved net profit of 0.34 million yuan, +32.2% year-on-year and +42.0% month-on-month, all of which improved from month to month. The company plans a cash dividend of 72.9 million yuan, with a dividend payment rate of 50.07%.

The price of tungsten raw materials is high, and product costs are rising at the same time, squeezing gross profit margins. In terms of sales, in 2023, the company sold 4175 tons of tungsten powder, up 3.31% year on year; sales of tungsten carbide powder were 4,913 tons, up 2.28% year on year; sales of thermal spray powder were 442 tons, up 18.50% year on year; hard alloy sales volume of the company headquarters was 1104 tons, up 10.28% year on year; Ganzhou Aoketai hard alloy (blade) sales volume was 20.417 million pieces, up 27.66% year on year; hard alloy (bar) sales volume was 688.82 tons, up 6.71% year on year. In terms of price, due to the tight supply of raw materials, the price of tungsten products continued to fluctuate at a high level. According to data from the Asian Metal Network, the average price of tungsten concentrate (WO3 ≥ 65%) in 2023 was 119,300 yuan/ton, up 5.30% from the average price in 2022. The company's tungsten powder and tungsten carbide powder products are at the middle end of the industrial chain. Their production costs are strongly correlated with the price of tungsten concentrate, and competition in the superposition industry is intensifying. The gross margins of tungsten powder and tungsten carbide powder in 2023 were 9.18% and 8.94%, respectively, down 0.25 and 1.54 percentage points from the previous year. In terms of hard alloys, gross margin declined due to high competitive pressure in the market for some general-purpose alloy products, discounted sales to protect customers; however, production and sales of high-end blade alloy products increased, and production costs declined year on year. The gross margin of tungsten carbide was 14.30% in 2023, an increase of 0.49 percentage points over the previous year.

Profits turned into losses due to increased sales expenses and loss due to price declines in some inventory items. In 2023, Ganzhou Aoktai achieved operating revenue of 550 million yuan, an increase of 9.05% over 2022, including sales revenue of coated blades of 310 million yuan, an increase of 27.90% over the same period of the previous year, with a calculated unit sales price of 14.95 yuan/piece; bar sales revenue was 210 million yuan, a decrease of 0.94% over the same period last year, and the calculated unit sales price was 305,800 yuan/ton.

In 2023, the market price of Auctec bar products fell, and production capacity was not fully released, resulting in an inversion of gross profit, resulting in inventory depreciation; as well as a sharp increase in sales expenses due to increased sales team personnel and exhibition promotion to develop the market, resulting in a loss of 48.75 million yuan.

Profit forecast. We focus on the profit model of our subsidiary Auctech. The import substitution logic will contribute volume and price increases to the company. We expect the company's revenue for 2024-2026 to be 38, 4 billion yuan, and 4.1 billion yuan, respectively, and net profit of 2.1, 270 million yuan, and 360 million yuan respectively, with year-on-year growth rates of 49.0%, 27.9%, and 31.7%. Corresponding to the closing price of April 22, 2024, PE will be 37.1x, 29.0x, and 22.0x, respectively, maintaining a “buy” rating.

Risk warning: APT prices fell sharply; production capacity of ultra-fine tungsten carbide powder fell short of expectations; downstream market demand for blades and bars fell short of expectations.