Incident: The company recently released its 2023 Annual Report and 2024 Quarterly Report.

The results of 23 & 24Q1 were under pressure; net profit to mother fell 31% year on year in year 23, down 50% year on year in 24Q1. In 2023, the company achieved operating income of 1,026 million yuan, down 2.73% year on year; net profit to mother was 166 million yuan, down 31.43% year on year. The pressure on performance is mainly due to insufficient downstream demand, a decline in the company's capacity utilization rate, and insufficient scale effect. By product, 1) CNC tools: revenue was 579 million yuan, down 9.98% year on year; sales volume was 87.73 million pieces, with an average unit price of 6.59 yuan/piece; high-end products accounted for 18.19% of revenue, up 4.73 pct year on year. 2) Hard alloy products: Revenue of 445 million yuan, up 9.98% year on year, including sales of serrated products of 804 tons and sales of bars of more than 400 tons. By sales channel, direct sales revenue was 610 million yuan, down 6.61% year on year; distribution revenue was 414 million yuan, up 4.94% year on year.

The 2024Q1 company achieved revenue of 264 million yuan in a single quarter, down 7.03% year on year and up 18.98% month on month; net profit to mother was 29.85 million yuan, down 49.66% year on year, up 364.16% month on month. The year-on-year pressure on the revenue side and profit side was mainly due to the high base for the same period last year.

Profitability is under pressure. In 2023, gross margin decreased by 7.43 pcts year on year, and in 24Q1, profitability decreased by 7.14 pcts year on year: gross sales margin and net margin were about 29.32% and 16.17% respectively, down 7.43 and 6.77 pcts year on year. Among them, the gross profit margin of CNC tool products was 40.42%, down 7.1 pct year on year; the gross profit margin of hard alloy products was 14.93%, down 5.3 pct year on year. Profitability pressure in 2023 is mainly due to insufficient downstream demand, declining company capacity utilization, and insufficient scale effects.

2024Q1's gross profit margin in a single quarter was 25.09%, down 7.14 pcts year on year, up 7.46 pct month on month; net sales margin was 11.31%, down 9.58 pct year on year, up 8.41 pct month on month. The pressure on 2024Q1 profitability is mainly due to the fact that new production capacity climbs and gross margin is at a low level, lowering the overall gross profit margin.

Cost side: The cost rate during 2023 was 14.33%, an increase of 2.89pct over the previous year, mainly due to the increase in sales and R&D expenses. Among them, sales, management, R&D, and financial expense ratios were about 4.2%, 3.58%, 6.22%, and 0.32%, respectively, with year-on-year changes of +2.03, -0.9, +1.2, and +0.57 pct, respectively. The cost rate during 2024Q1 was 15.04%, up 5.98pct year over year.

The domestic manufacturing industry boom cycle is rising at the bottom, product structure optimization+full package business+overseas expansion to promote growth 1) Product structure optimization: ① The share of high-end products increased: In 2023, the company's share of high-end CNC blades continued to increase. Revenue from products above 10 yuan accounted for 18.19% of CNC blade revenue, an increase of 4.73 pcts over the previous year. ② Product Matrix Expansion: The company's IPO and fixed increase projects will further expand the company's product matrix, which is expected to improve profitability. In the first half of 2023, based on the original production capacity, the company launched a production capacity improvement project for 20 million high-end CNC blades ahead of schedule, mainly for small-part processing, fine grinding blades, and high-end tools with high unit prices in the aerospace field. The “CNC Tool Industrial Park Project” plans to build 1,000 tons of bars, 3 million overall tools, 200,000 sets of CNC tools, and 5 million ceramic blades. It will enter the production capacity investment stage in 2024.

2) Continuous development of end customers: ① Oukeyi brand stores cover small and medium-sized customers; ② Selci brand stores cover medium-sized customers to serve customers with overall tool configuration requirements; ③ launch a turnkey solution for large customers with complete package and on-site tool management needs.

3) Accelerating overseas market expansion: The company seizes export opportunities and increases overseas development efforts. Overseas brand agents continue to increase, and overseas layout is further improved. Overseas market revenue in 2023 was 140 million yuan, up 31.44% year over year.

Profit forecasting and valuation

Net profit due to mother for 2024-2026 is estimated to be $2.12, 2.79 million, and 357 million, up 28% year-on-year, and CAGR = 30%. The corresponding PE is 16, 12, and 9 times, maintaining the “buy” rating.

Risk warning:

1) The recovery of the manufacturing industry fell short of expectations; 2) the domestic competition pattern deteriorated; 3) Overseas market development progress fell short of expectations.