1Q24 results fell short of our expectations
The company announced its 2023 results: revenue of 790 million yuan, +32.0% year over year; net profit to mother of 160 million yuan, -4.8% year over year. The revenue side achieved a sharp rise in volume and price. The profit side was mainly due to additional equity incentive fees and interest expenses on convertible bonds of around 50 million yuan in 2023, which is in line with our expectations. The company announced its 2024 quarterly report. In 1Q24, it achieved revenue of 170 million yuan, +13.2% year over year; net profit to mother was 0.2 billion yuan, -28.7% year over year. The revenue side was in line with our expectations. The profit side was mainly due to the increase in the share of hardened tools, which dragged down profitability, lower than our expectations.
The amount of turning tools is obvious, and the overall tool gross margin is under pressure. By product, turning/milling/drilling/overall tool revenue was +31.4%/-0.57%/+44.07%/+451.18% respectively to 5.2/1.8/0.2/60 billion yuan. New steel turning blade products were widely recognized by customers. Furthermore, overall tools were released on a large scale. In terms of gross margin, the gross margins of turning/milling/drilling/overall tools are 48.06%/51.44%/73.99%/2.81% respectively, and the overall tool achieved a positive gross profit margin throughout the year. In 1Q24, capacity utilization was affected by downstream operating rates, and overall tool profitability turned negative.
The cost side and gross margin side are under double pressure. In 2023, the company's sales/management/R&D/finance expense ratios were +1.67/-0.57/+0.76/+1.47ppt to 4.7%/5.2%/7.7%/3.6%, respectively. The increase in the cost ratio was mainly due to an increase in equity incentive expenses and interest on convertible bonds. In 2023, the company's gross margin was -3.3ppt to 45.1% year-on-year, mainly due to a decline in hardening tool production capacity. Under the combined influence, the company's net interest rate in 2023 was -7.7ppt to 19.9% year-on-year, further straining 1Q24's profitability.
Development trends
Focus on product upgrades and accelerate the expansion of overseas sales & distribution channels. 1) Going overseas: The overseas tool market space is broad and the competitive pattern is better. We believe that the company's overseas revenue is expected to continue high double-digit growth in 2024, and overseas products are expected to increase profitability; 2) Hardening tool growth: The company will continue to expand its hardening tool production capacity from 2023, and has successively passed verification by major customers such as Foxconn and Lixun. We determine that major direct sales customers need to expand in 2024. Furthermore, we expect the company to successfully achieve 10 million yuan of revenue in the first quarter of 2024 through the distribution channel for hard tools. degree Hardening tools have resonated with distribution & direct sales, the scale effect has been released, and an inflection point in profitability can be expected.
Profit forecasting and valuation
We have basically kept the 2024-2025 net profit forecast of 200/260 million yuan unchanged. The current stock price corresponds to 2024-2025 P/E 19/14x, respectively. We keep our target price of 73 yuan unchanged. The target price corresponds to the 2024-2025 P/E of 22/17x, respectively. Currently, there is room for a 21.1% increase in stock prices, maintaining the “outperforming industry” rating.
risks
The progress of going overseas fell short of expectations, and demand from the manufacturing industry fell short of expectations.