2023 and 1Q24 results fall short of market expectations

The company announced its 2023 and 1Q24 results: in 2023, the company achieved operating income of 3.618 billion yuan, YoY +30.06%; realized net profit to mother of 492 million yuan, YoY +1.33%. In 1Q24, the company achieved operating income of 749 million yuan, YoY -20.56%; realized net profit of 73 million yuan, YoY -49.37%.

The performance fell short of market expectations, mainly due to the impact of inventory removal and product restructuring by core downstream customers.

Development trends

The main business continues to grow, and the boom in overseas markets injects new volume. 1) In 2023, the company achieved revenue of 1,129/9.29/862 million yuan in aerospace forgings/petrochemical forgings/electric power forgings respectively, and YoY +13.28%/20.72%/115.00%. The main aerospace industry is growing steadily, and downstream demand in the petrochemical and wind power markets is growing rapidly. 2) In 2023, the company achieved revenue of 490 million yuan in overseas markets, YoY +179.15%, and gross margin increased 6.18ppt to 17.27% year-on-year. We believe that against the backdrop of strong recovery in overseas market demand, the company is expected to fully benefit as a domestic high-end ring forging leader.

The cost ratio increased by 1.07ppt year on year, and product structure and price adjustments led to a year-on-year decline in gross margin. 1) In 2023, the company's expense ratio was 8.48%, with a year-on-year increase of 1.07ppt. Among them, sales/management expenses increased 0.38/0.48ppt to 1.60%/2.35%, respectively; the 1Q24 expense ratio increased 1.10ppt to 9.07% year-on-year, respectively. Due to factors such as talent introduction and intermediary agency service fees, the cost rate increased in the short term. 2) In 2023/1Q24, the company achieved a gross profit margin of 23.89%/21.01%, a year-on-year decrease of 1.47pp/5.31ppt, mainly affected by product restructuring.

Set up a subsidiary to expand overseas markets, and it is proposed to issue convertible bonds to expand forging production capacity and expand the precision processing business.

1) In April 2024, the company announced that it plans to invest 8 million US dollars to establish an overseas wholly-owned subsidiary of Castepro. We believe that the company continues to expand overseas business and is expected to fully benefit from increased demand in overseas markets. 2) In April 2023, the company announced that it plans to issue convertible bonds to raise 1.95 billion yuan for intelligent aerospace precision annular forging production lines and precision parts processing projects. We believe that expanding the company's aerospace forging production capacity is expected to continue to increase large-scale production capacity, and extending the downstream business chain layout precision processing business is expected to further enhance the company's core competitiveness.

Profit forecasting and valuation

Taking into account the pace of mass production and delivery of the company's downstream equipment models, we lowered our 2024 net profit forecast by 38.8% to 515 million yuan, and introduced a net profit forecast of 590 million yuan for 2025. The current stock price corresponds to 2024/2025 15.2/13.3x P/E. We maintained our outperforming industry rating and lowered our target price by 37.70% to 77.86 yuan, corresponding to 18.33/16.0x P/E in 2024/2025, with a potential increase of 20.6%.

risks

1) Risk of product price reduction; 2) Orders and product delivery fall short of expectations.