The 2023 results were generally slightly above our expectations

The company announced its 2023 results: revenue of 12.7 billion yuan, -2.6% year-on-year, affected by weak demand in the downstream manufacturing industry; net profit to mother was 485 million yuan, -9.4% year over year, slightly higher than our expectations, mainly due to asset disposal income. The company released its quarterly report. 1Q24 revenue was 2.97 billion yuan, -2.9% year on year; net profit to mother was 64 million yuan, or -36.0% year on year. The pressure on raw materials continued in the first quarter, and the performance fell short of our expectations.

Refractory metals continue to grow at a high rate. By business, revenue from cutting tools/hard alloys/refractory metals/powder products was -7.8%/-2.6%/+23.5%/+7.8% to 30.6/34.3/21.7/2.54 billion yuan, respectively. Revenue from cutting tools and hard alloys declined slightly due to manufacturing demand; refractory metals were driven by demand from semiconductors, etc., and the powder products business grew due to rising raw material prices and downstream stocking demand.

Profitability declined slightly due to a double squeeze on the supply and demand side. In 2023, the company's gross margin was -0.7ppt to 16.2% year on year, and 1Q24 gross margin declined further to 13.6%, mainly due to increased raw material prices and insufficient capacity utilization. In 2023, the company's sales/management/R&D/finance expense ratios were +0.3/-0.1/+0.89/+0.13ppt to 3.2%/4.7%/4.1%/0.4%, respectively, and the cost ratio remained stable during the period. The year-on-year decline in net interest rate of -0.3ppt to 3.8% in 2023 was lower than gross profit margin, mainly due to asset disposal income of 120 million yuan.

Development trends

Mining injections have boosted profits, and overseas expansion can be expected to continue. 1) Mine injection can be expected: The company announced in early 2024 that it intends to acquire 100% of the shares of Hunan Shizhuyuan Nonferrous Metals Co., Ltd. Recently, the price of tungsten concentrate has continued to rise to a high of nearly 5 years. Considering the fixed mining costs, the rise in mineral prices may benefit the mine's profit for the whole year. 2) Outstanding overseas performance: We calculate that overseas revenue in 2023 will account for more than 30% of Zhuzhou Diamond (Chinatungsten Hi-Tech Subsidiary). It has two subsidiaries in Germany and the US. As the company with the earliest overseas layout, channel management is mature. We think expanding to the Southeast Asian market in 2024 is a major highlight. 3) Research and development drives scientific and technological innovation: The company adheres to the path of scientific research and market development. In 2023, new products in the fields of roller materials, hobs, and difficult aerospace processing will gain market recognition. We expect the new product momentum to continue in 2024.

Profit forecasting and valuation

We have basically kept the 2024 profit forecast of 495 million yuan unchanged. For the first time, we introduced a profit forecast of 527 million yuan for 2025. The current stock price corresponds to 2024-2025 P/E 30/28x, respectively. Considering the downward movement of the tool sector's valuation center, we lowered the target price by 8% to 11.5 yuan, corresponding to the 2024-2025 P/E of 33/30x, respectively. The current stock price has room for growth of 7.4%, maintaining the “outperforming industry” rating.

risks

Demand from the manufacturing industry fell short of expectations, and the promotion of new products fell short of expectations.