Profit declined in '23 due to weak demand

On April 26, Chinatungsten Hi-Tech released its annual report. In 2023, it achieved revenue of 12.736 billion yuan (yoy -2.63%), net profit of 485 million yuan (yoy -9.36%), deducting non-net profit of 334 million yuan (yoy -30.13%). Among them, Q4 achieved revenue of 3.188 billion yuan (yoy +2.55%, qoq +6.20%) and net profit of 169 million yuan (yoy +24.33%, qoq +130.37%). Considering the weak downstream of tungsten carbide products and the intensification of the competitive landscape, we lowered our profit forecast. The company's net profit for 2024-2026 is estimated to be 5.3, 6.8, and 740 million yuan respectively (down 23% and 28% from the previous value of 6.9 million yuan and 940 million yuan in 2024-2025). Comparable company Wind agreed that the average PE value in 24 was 38 times. Considering that the company's growth rate was relatively weak compared to comparable companies, the company was given 35 times PE in 24, with a target price of 13.3 yuan (previous value of 11.6 yuan), maintaining a “buy” rating.

Tool revenue fell 8%, and new products continued to be introduced

The company's cutting tools and tools/other hard alloys/refractory metals/powder products business revenue was -8%/-3%/+23%/+8%, respectively. Overall tool and hard alloy terminal consumption was weak, and the increase in refractory metal revenue may be related to the fluctuation and upward trend in tantalum and niobium prices during the year. In terms of products, the company continues to introduce new products. Zhudrill's “PANGU” series high-end products for efficient processing of difficult materials have been successfully applied by aerospace customers. Jinzhou's dental tools successfully passed medical device quality management system certification, breakthroughs were made in key technologies for the PV fine tungsten wire project, and the tensile strength of φ33 μm tungsten wire products exceeded 6000 MPa.

Competition in the industry intensified, and profitability declined in 23 years

The company achieved gross profit margin of 16.9%, net profit margin of 4.6%, and non-net profit margin of 2.6% in '23, -0.7, -0.4, and -1.0pct, respectively. By business, the gross margin of tools/other hard alloys/refractory metals/powder products was -0.9/-0.2/-2.4/-1.6 pct year on year, respectively. The main reason was increased competition and rising raw material prices. The gross profit from the export business was higher than domestic, and +3.1 pct year over year, and the performance was good. In terms of cost ratios, the company's 23-year sales/management/ R&D/finance expense ratios were +0.3/-0.1/+0.9/+0.1pct, respectively, and were basically stable. Among them, R&D investment was +25% year-on-year, maintaining high investment. At the same time, through measures such as adjusting the remuneration and incentive methods for R&D personnel, the raw material costs rose and 24Q1 profits declined. It is expected that subsequent surplus price transmission cost pressure will be released by the company in the same period. 24Q1 achieved revenue of 2.97 billion yuan, -3% year-on-year, and net profit of 63.85 million, or -36% year-on-year. The gross profit margin and net margin were -3.07 and -1.25pct, respectively. The decline in profitability was mainly due to the continuous rise in the prices of raw materials such as APT and tungsten carbide since the first quarter, and the increase in production costs. The pricing of tool products has a certain cost bonus attribute, and it is expected that upward pressure on raw material costs will be transmitted in the future through favorable prices, etc.

Risk warning: 1) The reform progress of state-owned enterprises falls short of expectations; 2) the degree of product overlap of domestic enterprises has increased; 3) downstream demand continues to be sluggish.