occurrences

On April 29, 2024, the company released its annual report for the year 23 and the quarterly report for 2014. In 23, it achieved operating income of 794 million yuan, an increase of 32.02% over the previous year, and realized net profit of 158 million yuan, a year-on-year decrease of 4.85% (after retroactive adjustment in accordance with accounting standards). 1Q24 achieved operating income of 170 million yuan, an increase of 13.24% year on year, and realized net profit of 0.17 million yuan, a year-on-year decrease of 28.69%.

reviews

In '23, the company's CNC blades continued to have high growth/high profitability, but profits were pressured by the full tool business:

1) CNC blades (turning+milling+drilling) still performed well: in '23, they achieved revenue of 722 million yuan, a year-on-year increase of 22.07%, achieved a gross profit margin of 49.65%, a year-on-year decrease of 0.56 pcts, achieved a high growth rate against the backdrop of weak industry demand, and maintained a strong level of profit. The average price of a CNC blade in 23 years was 7.01 yuan/piece, and in 22 years it was 6.57 yuan/piece.

2) Overall tungsten carbide tools dragged down overall performance: The overall tungsten carbide tool business achieved revenue of 59 million yuan in '23, an increase of 949.84% over the previous year, and the business began to expand. However, due to the large amount of fixed costs during the production capacity climbing phase, the gross margin was only 2.81%, which had a big impact on the company's final profit.

3) In '23, the company confirmed that the share payment fee for equity incentives was RMB 27.968 million and interest expenses of RMB 26.914,800 on convertible bonds, which also had an adverse impact on profits.

We believe 1Q24's performance is still being dragged down by overall hard alloy tools. There is plenty of room for improvement along with the increase in production capacity utilization: 1Q24's revenue increased but profit declined year on year. The gross margin fell 8.08pcts year on year from 45.32% in 1Q23 to 37.24% in 1Q24. We believe that the share of overall hard alloy tool revenue with low gross margin increased, leading to a decline in overall gross margin. Performance continues to be under pressure. There is plenty of room for improvement in the subsequent increase in capacity utilization.

Profit Forecasts, Valuations, and Ratings

The company is expected to achieve net profit of 2/271/341 million yuan from 24 to 26, corresponding to current PE19X, 14X, and 11X. Considering the continuous advancement of domestic domestic substitution in the tool industry, there is plenty of room for growth when going overseas, and maintaining a “buy” rating.

Risk warning

The progress of domestic substitution fell short of expectations, the increase in the average price of CNC blades fell short of expectations, the expansion of production capacity fell short of expectations, and the overall improvement in the gross margin of hard alloy tools fell short of expectations.