Demand for tungsten carbide was weak, and revenue declined slightly. In 2023, the company achieved revenue of 12.740 billion yuan, down 2.63%, mainly due to weak consumption of tungsten terminals. By product, revenue from cutting tools and tools was 3,057 billion yuan, down 7.85%; revenue from other hard alloys was 3.431 billion yuan, down 2.64%; revenue from refractory metals was 2.172 billion yuan, up 23.49%, mainly due to sales of core products such as tantalum and niobium products bucking the trend; revenue from powder products was 2,537 billion yuan, up 7.80%. In 2024Q1, the company's revenue was 2,967 billion yuan, down 2.95%, mainly due to weak recovery in downstream demand. The company plans to acquire 100% of the shares of Kakizhuyuan Company. In the first three quarters of 2023, Kakizhuyuan Company's revenue is 1,998 billion yuan. Asset injection will increase the size of the company.

Gross margin declined due to falling demand and rising raw material prices. In 2023, the company's overall gross margin was 16.87%, down 0.66 pcts year over year. Among them, the gross profit margin of blade products was 33.58%, down 0.9 pct year on year; the gross profit margin of alloy products was 14.11%, down 0.17 pct year on year. Mainly due to increased competition in the industry, prices of raw and auxiliary materials continued to rise, and the company's profit margin narrowed. The overall gross margin of 2024Q1 was 14.16%, down 3.07pct year-on-year, mainly due to the continued rise in raw material-level products and increased production costs. In terms of raw materials, by the end of the first quarter of 2024, the price of black tungsten concentrate (65%) was 127,000 yuan/ton, an increase of 3.25% over the end of last year. Since April, the price of tungsten began to rise at an accelerated pace. However, we believe that demand will have a greater impact on gross margin. If demand continues to recover later, upstream price transmission to downstream will be smoother, and gross margin is expected to gradually improve. In addition, Kakizhuyuan is expected to produce 7,000-8,000 tons per year, and has the highest industrial mining reserves in the world, which is conducive to increasing the self-sufficiency rate of tungsten ore.

Fist products have obvious advantages, and high-quality tungsten ore is about to be injected. In 2023, the company's hard alloy production exceeded 14,000 tons, which is basically the same as the previous year, accounting for about 26% of the domestic market, ranking first in the world. Among them, Zhu Drill's CNC blades and Jinzhou's micro drills are the company's best products. 1) CNC blades: Production of about 140 million pieces in 2023, an increase of 7.69%, accounting for about 20% of the total domestic production, ranking first in the country; 2) PCB micro drills: the technical transformation project to upgrade capacity and expand production of 200 million micro drills in 2023 was officially launched, with an estimated construction period of four years. The company's new project with an annual output of 10 billion meters of fine tungsten wire has been completed and put into operation. The direct product throughput rate is gradually improving, and production is expected to be released soon. The EIA for the 10,000 t/d harvesting technology improvement project of Kakizhuyuan Company has been approved. The construction period is expected to be 4 years, and future tungsten production is expected to increase dramatically.

Cost reduction and efficiency increases continue to advance, and period expenses are strictly controlled. The company's expense ratio for the 2023 period was 12.30%, up 1.15 pct; of these, the sales expense ratio was 3.20%, the same increase was 0.28 pct, mainly due to increased marketing efforts and travel expenses; the management expense ratio was 4.66%, down 0.15 pct; the R&D expenses rate was 4.06%, the same increase of 0.89pct, mainly due to increased investment in R&D; the financial rate was 0.39%, increasing 0.13 pct, mainly due to a decrease in exchange earnings. The company calculated various types of impairment of about 61 million yuan, a year-on-year decrease of 27 million yuan. Taken together, the company's balance ratio in 2023 was 49.90%, an increase of 2.32pct. In 2023, the company's net profit to mother was 485 million yuan, down 9.36%; in 2024Q1, the company's net profit to mother was 63.85 million yuan, down 35.97%. In the first three quarters of 2023, Kakizhuyuan Company now has a net profit of 395 million yuan. If the acquisition is successfully completed, it is expected to significantly increase the company's performance.

Investment advice: The company's tungsten wire is about to be released, and demand in the tool market is expected to recover. The injection of Wakagaki Chikuen will significantly boost performance. Regardless of the injection situation, due to weak demand last year, the company is expected to achieve net profit of 5.42, 6.05, and 719 million yuan in 2024-2026, corresponding price-earnings ratios of 27.6, 24.7, and 20.8 times, maintaining a “highly recommended” rating.

Risk warning: the risk of tungsten price fluctuations, the company's project progress falls short of expectations, and downstream demand for products falls short of expectations.