Core views

In 2023, the company sold about 103.9145 million CNC blades, with an average price of 7.61 yuan/piece; the average sales price increased by 15.83%, the overall volume and price increased sharply, and overseas and direct sales grew faster.

New production capacity is still climbing. Combined, the initial gross margin was low, affecting the overall gross profit margin. At the same time, equity incentive fees and convertible bond expenses led to a decline in profits, which is expected to improve in 2024.

Looking ahead to 2024, benefiting from the recovery of the domestic manufacturing industry and the continued advancement of domestic substitution, sales of high-end products will drive increased profitability. Overall hard alloy tools will continue to be released in 3C, aerospace and other fields, and overseas channel expansion will also open up a wider market, and the sharp rise in volume and price is expected to continue.

occurrences

In 2023, the company achieved revenue of 794 million yuan, a year-on-year increase of 32.02%, net profit of 158 million yuan, a year-on-year decrease of 4.85%, after deducting non-net profit of 155 million yuan, a year-on-year decrease of 3.20%; in Q4 alone, it achieved revenue of 207 million yuan, an increase of 3.67% over the previous year, and a net profit of 52 million yuan, a year-on-year decrease of 5.32%;

2024Q1 achieved revenue of 170 million yuan, an increase of 13.24% year on year, net profit attributable to mother of 0.17 million yuan, a decrease of 28.69% year on year, after deducting non-net profit of 0.16 million yuan, a decrease of 26.06% year on year.

Brief review

CNC blades have achieved a sharp rise in volume and price, and overseas and direct sales are growing faster

In 2023, the company's revenue increased by 32.02% year-on-year, achieving good growth against the backdrop of poor overall manufacturing prosperity, indicating that the company has strong product development and market development capabilities.

1) Judging from sales volume and average price performance, there is a clear trend of sharp rise in volume and price. In 2023, the company sold about 103.9145 million CNC blades, with an average price of 7.61 yuan/piece; compared with 9.05 million pieces in 2022, the average price increased significantly by 6.57 yuan/piece, and the average sales price increased by 15.83%. We believe this is related to the gradual increase in the company's middle and high-end blade production capacity to reach sales and the increase in the proportion of total blades with higher unit prices.

2) By business, turning and drilling blades have achieved good growth. Turning, milling, and drilling blades achieved revenue of 524, 1.77, and 021 million yuan, respectively, of +31.38%, -0.57%, and +44.07% year-on-year, respectively, and gross margins of 48.06%, 51.44%, and 73.99%, respectively.

3) By region, overseas revenue is growing rapidly. Domestic and overseas market revenue was 743 million yuan and 47 million yuan respectively, +30.26% and +60.90% year-on-year respectively. Overseas market revenue grew rapidly, but the revenue share was still low, accounting for only 5.89%. At the same time, the gross margin of the overseas market is 53.96%, 9.31pct higher than the 44.65% in the domestic market, and the profitability is better. We believe this is related to the better overseas competitive environment and better overall performance of export products. It is expected that overseas revenue will grow faster in 2024.

4) By channel, direct sales are growing faster. The revenue from distribution and direct sales channels was 719 million yuan and 0.71 million yuan, respectively; the revenue accounts for 91.01% and 8.99%, respectively. Distribution is still the main sales channel, but in 2024, the company will focus on major direct sales terminal customers, such as complete tools, which are expected to begin to be released in the 3C and aerospace fields. It is expected that the share of direct sales revenue will increase significantly, and overall sales of tools through direct sales channels will also lead to an improvement in overall gross margin after the scale effect is reflected.

Reduced gross margin and convertible bond costs affect overall profit performance. It is expected that in 2024, new production capacity will continue to rise. Combined with the low gross margin at the beginning of full volume, it will affect the overall gross profit margin. In 2023, the company achieved a gross profit margin of 45.47%, a year-on-year decline of 3.38pct; in 2024Q1, the company achieved a gross profit margin of 37.24%, a year-on-year decline of 8.08pcts, mainly due to: ① The fixed costs of the medium and high-end tool products raised by the company in the early stages of the production capacity climb phase, and the scale effect has yet to be reflected; ② Overall tool revenue increased by 949.84%, accounting for 7.49% of revenue from 2022, and in the early stages of the introduction of this type of product on the client side, processing technology, procurement and raw materials The scale effect is still unclear. The gross margin is only 2.81%, which has a large impact on the overall gross margin.

Profit declined due to equity incentive fees and convertible bond expenses. The company's net profit in 2023 fell 4.85% year-on-year, lower than the revenue growth rate. In addition to factors affecting the decline in gross margin, it was mainly due to: ① confirmed share payment fees of RMB 27.968 million. In 2022, the related expenses were less than 5 million yuan; ② interest expenses on convertible bonds increased, with expenses of 26.914,800 yuan. This cost in 2022 was only half of what it was in 2023.

The release of high-end production capacity plus full tools and overseas channel expansion is expected to continue to achieve a sharp rise in volume and price in the future. In April 2023, the company's IPO projects “Precision CNC Tool Digital Production Line Construction Project” and “R&D Center Project” were successfully completed, which will effectively solve the company's production capacity bottlenecks and enrich the product structure in the process of climbing production capacity. Overall hard alloy tools are expected to be released in 2024.

At the sales level, the company continues to make efforts in overseas sales, increasing the size of the foreign trade business team, participating in the Ho Chi Minh International Machine Tool and Metalworking Exhibition in Vietnam and the Russian Machine Tool and Metalworking Exhibition, continuing to broaden market channels, enhance brand awareness, and further expand overseas business.

Investment advice

Huarui Precision is a leading domestic CNC tool company with a complete range of products and high-quality channel management. Looking ahead to 2024, benefiting from the recovery of the domestic manufacturing industry and the continued advancement of domestic substitution, sales of high-end products will drive increased profitability. Overall hard alloy tools will continue to be released in 3C, aerospace and other fields, and overseas channel expansion will also open up a wider market, and the sharp rise in volume and price is expected to continue.

The company is expected to achieve net profit of 215, 2.85, and 356 million yuan respectively in 2024-2026, up 36.30%, 32.29%, and 25.10% year-on-year respectively. The corresponding PE is 20x, 15x, and 12x, respectively, maintaining a “buy” rating.