Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 12.74 billion yuan, a decrease of 2.6% year on year; net profit to mother was 480 million yuan, a decrease of 9.4% year on year; net profit after deducting non-return to mother was 330 million yuan, a decrease of 30.1% year on year. With 2024Q1, the company achieved revenue of 2.97 billion yuan, a year-on-year decrease of 3.0%; net profit to mother was 64 million yuan, a decrease of 36.0% year-on-year.

In 2023, domestic demand weakened, revenue declined slightly, raw material prices rose, and gross margins were under pressure. The overall domestic economic situation was weak in 2023. Most of the company's products are procyclical, greatly affected by the macro environment, and total revenue declined slightly. In 2023, the company's comprehensive gross margin was 16.9%, down 0.7 percentage points from the previous year. It was mainly due to weak demand and rising upstream raw material prices, which put pressure on the company's profitability. 2024Q1, the company's comprehensive gross margin was 14.2%, a year-on-year decrease of 3.1 percentage points.

Investment in R&D was increased, and the cost ratio increased slightly during 2023, and the net interest rate declined slightly. The company's expense rate for the 2023 period was 12.3%, up 1.2 percentage points year on year, mainly due to a 0.9 percentage point increase in R&D expenses; 2024Q1, the cost rate for the period was 11.3%, a decrease of 0.3 percentage points year on year. In 2023, the company's net interest rate was 4.6%, a year-on-year decrease of 0.4 percentage points. The net interest rate declined slightly, mainly benefiting from an increase of 120 million yuan in non-recurring asset disposal income; 2024Q1, the company's net interest rate was 2.7%, a decrease of 1.3 percentage points over the previous year.

The bottom of the domestic cycle is rising, the overseas market continues to expand, and the company's tool business has broad room for growth. From the perspective of the inventory cycle, industrial enterprises began taking inventory in May 2022. It has been 22 months since February 2024. In February 2024, the inventory of finished products produced by Chinese industrial enterprises increased 2.4% year-on-year, and the bottom was hovering upward. The company's mainstream products, such as CNC blades, bars, and other hard alloy products, are all procyclical products, and the industry boom is expected to reverse. In the long run, the overseas tool market is about 4 times that of the domestic one. As a leading domestic tool, the company has taken a place in the overseas market with its product strength and cost performance, and there is plenty of room for future growth.

Mine injection was gradually implemented, and the company's operating stability was enhanced. In January 2024, the company announced that it intends to acquire 100% of the shares of the mining company Kakizhuyuan. Mining enterprises under the Minmetals Group will gradually be injected into listed companies, which will help improve corporate governance, directly enhance the profitability of listed companies, and improve the operating stability of listed companies. Tungsten concentrate and downstream hard alloy products are at both ends of the profit smile curve of the tungsten industry chain. At the same time, the price of tungsten concentrate directly affects the profits of downstream hard alloy products. After the mine is injected into the listed company, the volatility of Chinatungsten Hi-Tech's performance will be significantly reduced.

Profit forecasting and investment advice. The company's net profit for 2024-2026 is estimated to be 5.2, 6.3 billion yuan, and 740 million yuan respectively. The compound net profit growth rate for the next three years will be 15%, maintaining a “buy” rating.

Risk warning: risk of macroeconomic fluctuations, risk of asset injections falling short of expectations, risk of fluctuations in raw material prices.