Incidents:

The company announced on April 23 that it announced 2023 revenue ($3.408 billion, +18.37%), net profit attributable to mother ($319 million, -5.17%), net profit after deducting non-return to mother ($308 million, +9.83%); gross profit margin (29.22%, +1.54pcts), net profit margin (12.20%, -1.08pcts). Revenue for the first quarter of 2024 ($799 million, +28.61%), net profit attributable to mother ($95 million, +57.74%). Key investment points: Revenue growth is steady, overseas business growth is remarkable. Rapid growth in inventory and contract liabilities highlights strong downstream demand. In 2023, the company achieved revenue (3.408 billion yuan, +18.37%), achieved steady growth, net profit to mother (319 million yuan, -5.17%), net profit not returned to mother (308 million yuan, +9.83%). The gross profit margin (29.22%, +1.54pcts) declined slightly due to cost reduction factors for bulk raw materials (nickel plate, ferrochrome, etc.) in 2023; the net profit margin (12.20%, -1.08pcts) declined slightly due to reduced government subsidies (0.06 million yuan in 2023, 76 million yuan in 2022) and increased management expenses due to the commissioning of subsidiaries.

2024Q1, the company's revenue (799 million yuan, +28.61%), net profit to mother (95 million yuan, +57.74%), both revenue and profit reached record highs during the same period, and the company's performance got off to a good start.

During the reporting period, the company's expense ratio for the period (14.80%, +1.25pcts), of which the sales expense ratio (1.70%, +0.57pcts), rebounded mainly due to increased sales scale and foreign market development expenses; management expense ratio (7.36%, +0.92pcts), mainly due to increased related fixed costs driven by the gradual commissioning of projects and the construction of new subsidiaries; financial expense ratio (0.67%, -0.22pcts). The reduction in financial expenses stemmed from a decrease in interest expenses due to reduced borrowing; R&D expense ratio (5.07%, - 0.0lpcts), basically stable.

At the end of the reporting period, the company's inventory (1,635 million yuan, +55.43%), including products (644 million yuan, +50.12%), inventory (494 million yuan, +66.33%), issued products (314 million yuan, +73.48%), raw materials (149 million yuan, +15.50%), the company's new project paving inventory increased, and customers delayed receipt of some products. In addition, contract liabilities ($299 million, +125.69%), and the rapid expansion of inventory and contract liabilities also confirm strong downstream demand.

The main products of the company and its holding subsidiaries Hebei Dekai and Xi'an Gaona, wholly-owned subsidiaries Zhuozhou Gaona and Sichuan Gaona are key materials for manufacturing core components for aerospace engines, as well as core materials for large-scale power generation equipment, such as industrial gas turbines, helium turbines, flue gas turbines, and thermal power generators.

The company integrated cast superalloys and lightweight alloys into its subsidiary Hebei Dekai, which had complementary advantages and undertook the R&D tasks of various new products from many OEMs and design institutes. In 2023, Hebei Dekai achieved operating income (1,054 billion yuan, +10.14%), net profit (147 million yuan, -9.26%). Revenue achieved steady growth, and net profit declined slightly.

The holding subsidiary Qingdao Xinlitong mainly produces products such as cracking furnace tubes and conversion furnace tubes, continuous annealing line (continuous galvanizing line) furnaces and radiation tubes, glass delivery systems, and high temperature and wear-resistant castings used in the petrochemical, metallurgy, glass, heat treatment and other industries, which are widely used in the petrochemical and metallurgical industries. In 2023, Qingdao Xinlitong's revenue (1.01 billion yuan, +39.33%) achieved rapid growth. Net profit (181 million yuan, +254.90%) grew rapidly.

The holding subsidiary Xi'an Steel Research & Development Co., Ltd. mainly develops and produces aerospace blades and small structural parts. In 2023, Xi'an Gaona achieved revenue and profit for the first time, with operating income of 108 million yuan and net profit of 121 million yuan.

During the reporting period, domestic business revenue (3,059 million yuan, +12.03%), accounting for 89.77%; foreign business revenue (349 million yuan, +134.85%), accounting for 10.23%. The business maintained rapid growth, mainly due to the gradual recovery of the company in overseas markets such as the Middle East.

Regarding daily related transactions in 2024, the company expects procurement transactions to be 275 million yuan, a year-on-year increase of 137.75% compared with the actual amount generated in 2023; sales transactions are 45 million yuan. Compared with the actual amount generated in 2023, casting superalloys are growing rapidly, GH4169 deformed superalloys have reached new highs in delivery, new alloys have achieved new breakthroughs, and various business lines have broad development prospects. The company's products include three categories: cast high temperature alloy products, deformed superalloy products and new high temperature alloy products.

① Casting superalloys and light alloys

In 2023, the company's operating revenue for cast superalloy products was 2,297 billion yuan (+32.58%), and the gross profit margin was 31.72% (+5.44pcts). The company's cast superalloy products mainly include superalloy master alloys, precision castings, and superalloy blades. Among them, in terms of master alloys, the company can produce dozens of grades of superalloy master alloys, including isometric crystals, directional solidification, and single crystal alloys. Precision casting products include small turbojet and turbofan engine casting turbine rotor and guide castings; large turbofan engine structural parts; commercial turbofan engine chassis structural parts with large duct ratio. Superalloy blades include isometric superalloy blades, directionally solidified superalloy blades, single crystal superalloy blades, etc.

In terms of research and development, the company broke through the core preparation process on a large model of monocrystalline alloys and turbine blades, and has batch delivery production capabilities; the company has improved quality stability through technological breakthroughs and process control, achieved mass production and delivery tasks for various turbine castings, and promoted the development of large-size thin-walled precision casting technology. The company has a layout of almost all aero engine models under development and mass production, providing a guarantee for developing the international market.

② Deformed superalloys

Deformed superalloys achieved operating revenue of 717 million yuan (+3.30%). The impact on the growth rate was mainly affected by the supply of raw materials. The gross profit margin was 15.67% (-3.84 cts). The decline in gross margin was mainly due to increased costs due to the company's new construction projects. The company's deformed superalloy products mainly include superalloy plate forgings, bars, plates, high temperature alloy rings for combustion chambers, high homogeneity turbine discs, etc.

The company's leading product, the GH4169 series alloy products, promoted product quality improvement through alloy technology, increased market share, and reached new delivery highs. At the same time, key investment and development of new products and new businesses have been carried out, and the transformation benefits of new product achievements are remarkable. Certain types of alloy turbine disc forgings have been produced in small batches, laying a good foundation for future diversification of deformed alloy products. In recent years, as the layout of production conditions has been strengthened, mass production delivery capacity will be further enhanced.

③ New high temperature alloys

The revenue of the new superalloy products was 351 million yuan (-12.10%), and the gross profit margin was 38.51% (-7.53pcts). The company's new superalloys include powder superalloy products, Ti2AlNb intermetallic compounds, oxide dispersion strengthened (ODS) superalloys, etc.

In the field of powder superalloys, the company has successfully developed powder superalloy plate forgings such as FGH4091, FGH4095, FGH4096, FGH4097, and FGH4098 to meet the design and application requirements of many key models of aero engines in the country. As the market demand for powder superalloys grew rapidly, demand for models began to increase. The FGH4097 high-pressure turbine disc won first place in the bidding for the localization of a certain plate. In recent years, it has also made major breakthroughs in FGH4096 and fourth-generation powder plate preparation technology, providing a guarantee for future mass production of powder superalloys.

Ti2AlNb intermetallic compounds completed the milling of Ti2AlNb bars, expanded the application of Ti2AlNb forgings in the field of turboshaft engines, and actively explored the field of deformed TiAl alloys.

Oxide dispersion strengthened (ODS) superalloys are a type of special superalloy that uses nano oxides to strengthen the alloy substrate. They have excellent high temperature strength and oxidation and corrosion resistance. The company completed the ODS alloy production expansion project, solved the bottleneck problem of grate ring supply, and established the first complete oxide dispersion-strengthened superalloy production line in China.

In addition, the company actively lays out 3D printing technology, integrates full chain technical capabilities such as material development, master alloy, milling, printing, thermal isostatic pressing, and inspection, and has rapidly grown into a domestic dominant force.

④ The field of petrochemical industry

The company entered the petrochemical, metallurgical and glass building materials high temperature furnace tube industry through the merger and acquisition of Qingdao Xinlitong. It gave full play to the company's advantages in new materials and process innovation, broke through key technologies such as novel anti-coking alloy component design, non-vacuum high-purity melting and centrifugal casting, machining, and welding of alloys with high active element content, and solved the problem of short coking cycle of cracking furnace tubes in the petrochemical industry, and the comprehensive anti-coking performance reached the world's advanced level.

The industrial layout with Beijing as its headquarters, seven cities and ten factories in six provinces was initially completed. The “from blank to piece” development plan achieved initial results. During the reporting period, the company initially completed the industrial layout with Beijing as its headquarters, seven cities, and ten factories in six provinces, completed the construction and commissioning of the Qingdao industrial base, realized the integration and adjustment of the two business units of Foundry and Decay, and expanded the industrial chain through various forms.

On October 21, 2023, Sichuan Iron and Steel Research Gaona was completed and put into operation as scheduled. The forging and rolling production line is mainly 30,000 tons of die forging and 500 tons of ring rolling equipment, marking the official launch of a research and industrial base for high-end metal plate ring forgings. Xi'an Steel Research Institute was jointly established by Steel Research Gaona and Aviation Power. Among them, Steel Research Gaona has a shareholding ratio of 67.79% and Aero Engine's shareholding ratio of 32.03%. The company is conducive to undertaking spillover production capacity from OEMs and expanding the company's parts processing business. As of November 3, 2023, Xi'an Iron and Steel Research Institute has completed the switch of product delivery entities and organized production and operation in an orderly manner according to the plan. In order to further promote the “from blank to piece” development plan, the company plans to establish a wholly-owned subsidiary “Liaoning Steel Research Gaona Intelligent Manufacturing Co., Ltd.” (tentative name, subject to industrial and commercial registration approval). At the same time, Steel Research Gaona participated in the company Steel Research Aurora, which developed 3D printing, etc.

Among the major non-equity projects underway during the reporting period, the company's Shenfu New Area Disc Shaft Processing Workshop Project and Decai Pingdu New Material Industry Base Project have completed construction; the progress of the Deyang Forging Phase I Project and the Aerospace Ring Rolling Pilot Plant Project has reached 90%; the Xi'an blade and (small) structural parts production base project has completed 65%. After the successful completion of the above projects, it is beneficial for the company to be closer to customers to increase production capacity, and future performance growth can be expected.

In order to achieve the company's development strategy, the company and April 23, 2024 issued a notice requesting the shareholders' meeting to authorize the board of directors to issue shares to specific targets through simple procedures. The total planned financing amount shall not exceed RMB 300 million.

Investment advice:

The increase in the company's demand for high-end and new superalloys mainly comes from several aspects: ① Aero engines: China's development of advanced engines for the autonomous aerospace industry will increase the market demand for high-end and new superalloys.

② Gas turbines: China's large power generation equipment manufacturing groups such as Shanghai Electric, Dongfang Electric, and Harbin Steam Turbine Factory have greatly increased in recent years in terms of production scale and production technology, which has boosted the demand for turbine discs used in power generation equipment. Next-generation power generation equipment, which is currently being developed domestically, has made significant progress and will drive demand for superalloys after mass production. At the same time, the localization of nuclear power equipment will also drive demand for domestically produced superalloys.

③ Foreign trade demand: The “Belt and Road” has passed through many emerging countries, such as ASEAN, Central Asia, India, etc. These countries are in the economic development stage and have obvious demand for basic industrial products such as petrochemicals, metallurgy, and building materials, which can drive the export and cooperation of related technology in China.

Gaona Steel Research is one of the enterprises with the most advanced technology and the most complete production range in the field of superalloys and light alloys in China. It is an important R&D and production base for domestic aviation, aerospace, ship and nuclear power industries, and one of the largest domestic enterprises producing high-end and new high temperature alloy products. In recent years, through various initiatives such as equity investment and self-built production lines, the company has collaborated with strategic customers, extended the industrial chain, and laid out new technologies and new fields. As domestic and foreign business continues to expand and production capacity climbs rapidly, the company's performance is expected to continue to grow steadily. We are optimistic about the company's medium- to long-term development.

Based on the above view, we expect the company's revenue for 2024-2026 to be 4.145 billion yuan, 4.869 billion yuan and 5.507 billion yuan respectively, with net profit attributable to mother of 424 million yuan, 538 million yuan and 657 million yuan respectively, and EPS of 0.55 yuan, 0.69 yuan and 0.85 yuan respectively. Maintaining a “buy” rating, the target price is 23.00 yuan, corresponding to 42 times, 33 times and 27 times PE, respectively.

Risk warning: geopolitical risk; risk of fluctuations in product prices and profit margins; exchange rate risk; risk of project construction falling short of expectations; risk of group management due to business integration and scale expansion, etc.