On May 21, Tiangong Co., Ltd. (834549), a subsidiary of Tiangong International (00826) that is sprinting to be listed on the Beijing Stock Exchange, released its report for the first quarter of 2024.

According to the data, thanks to continued breakthroughs in titanium alloy products in the consumer electronics sector, Tiangong Co., Ltd.'s revenue during the reporting period was 184 million yuan, up 29.58% year on year, net profit to mother was 475.407 million yuan, up 107.82% year on year, and net interest rate was 26.23%, up 10 percentage points from 16.28% in the same period in 2023, and nearly 13 percentage points from the fourth quarter of 2023.

This means that the titanium alloy business, which continues to break into the leading consumer electronics brand, has ushered in an accelerated release of profits. As a new growth curve for Tiangong International, this business has maintained strong growth after high growth in 2023, and continues to drive an increase in Tiangong International's intrinsic value.

At the same time as the performance of the titanium alloy business is impressive, the fundamentals of Tiangong International have also seen significant improvements. Its overall business operations have entered a steady, moderate and positive development trend, and it is expected to return to a growth trajectory in 2024. This is reflected in the following dimensions:

First, Tiangong International's fundamentals bottomed out in the second half of 2023 and rebounded.

In mid-2023, Tiangong International experienced varying degrees of decline in both revenue and profit in the first half of the year; however, after entering the second half of the year, Tiangong International's revenue increased 11.26% year on year, and gross profit increased 16.23% year on year. The steady recovery in business in the second half of the year drove Tiangong International's revenue growth 1.9% to 5.163 billion yuan (RMB, same below). Gross profit also remained flat year on year.

Specifically, the high growth of the high-end business throughout the year and the recovery in demand for tool steel (a collective term for mold steel and high speed steel) became the key reasons for Tiangong International's steady recovery in business development in the second half of 2023.

In terms of high-end business, thanks to the continuous penetration of powder metallurgy into high-end tools, the revenue of the cutting tool business increased by 19.7% in 2023; at the same time, titanium alloy products opened up the consumer electronics market and achieved high growth. The titanium alloy business surged 165.9% in 2023, making it Tiangong International's second largest business. In terms of tool steel, thanks to the stabilization of the domestic economy in the second half of the year, domestic downstream market demand rebounded, and revenue from mold steel and high-speed steel both achieved month-on-month growth.

From the changes in performance in 2023, it is easy to see that Tiangong International's high-end products are in short supply in the market with leading technical advantages, so the high-end business has shown good growth and is the main force driving performance growth. However, the key reason why tool steel can achieve continuous growth is stable market demand and the penetration of high-end products and technology.

Second, domestic and foreign market demand is expected to continue to grow in 2024.

In the domestic market, in order to raise domestic demand and ensure high-quality economic development in 2024, a number of major stimulus policies have been issued during the year, including the “Action Plan to Promote Large-Scale Equipment Renewal and Consumer Goods Trade-In” issued by the State Council. The “Plan” calls for promoting the upgrading of equipment in key industries, infrastructure equipment, transportation equipment, old agricultural machinery, and education, cultural tourism and medical equipment; at the same time, implementing trade-in of automobiles, home appliances, and consumer goods. The introduction of the “Plan” will drive the increase in demand in the national market. Taking the automobile industry as an example, China's automobile sales will increase 10.2% year-on-year from January to April 2024.

There is no doubt that with the continued promotion and implementation of these major policies, domestic market demand is expected to pick up at an accelerated pace this year. Whether it is equipment updates in various industries or the trade-in of consumer goods represented by automobiles, it will stimulate market demand for Tiangong International's full range of products, and Tiangong International will usher in new opportunities for growth.

Meanwhile, in foreign markets, the US interest rate cut cycle is about to begin, which will cause overseas demand to recover to a certain extent. Due to repeated inflation, although the market's expectations for the US interest rate cut in June have declined, given the current state of the US economy and debt pressure, the US interest rate cut during the year is also a probable event. Furthermore, from an inventory perspective, overseas channel companies' inventory removal is nearing its end, and it is expected that demand will first bottom out and then rebound. Therefore, overseas market demand is expected to improve this year compared to 2023.

Third, product prices continue to rise, and successful transmission of prices downstream is expected to drive an increase in Tiangong International's profitability, thereby accelerating performance growth.

Since this year, upstream metal prices have continued to rise due to the combined effects of various factors such as expectations of interest rate cuts from the Federal Reserve. As a leading enterprise in the special steel industry, Tiangong International has successfully transferred upstream costs to downstream. As early as January 10 of this year, Tiangong International posted the first price increase on its official account. Since then, Tiangong International has released 8 more product price increases one after another, and the prices of various products such as tool steel and tools have increased one after another.

For Tiangong International, the rise on the cost side is a good opportunity for the company to improve its profitability. This is not only because costs can be transferred, but also because Tiangong International has the highest production capacity of tool steel in the world. The scale effect gives the company an advantage in terms of raw material costs, thus achieving a better level of profit than its peers.

It is foreseeable that as fundamentals bottom up and demand in domestic and foreign markets recovers in 2024, the biggest adverse factor limiting the development of Tiangong International will gradually be eliminated, and the company's tool and tool steel business is expected to reverse the decline and achieve steady development. In terms of high-end products, with the continuous advancement of powder metallurgy applications, the continuous improvement of the cutting tool product matrix, and the high growth brought about by the accelerated penetration of titanium alloys, Tiangong International's high-end products will show greater growth flexibility. Coupled with the improvement in profitability brought about by the continuous increase in product prices, Tiangong International's 2024 performance will return to a high growth trajectory. Certainty.

The person who has the most confidence in Tiangong International's development is the company's management. The Zhitong Finance App found that since the release of the 2023 annual results, Tiangong International began repurchasing its shares on March 27. As of May 21, the number of repurchases was as high as 32, and the number of shares purchased from the beginning of the year to the present was as high as 29.552 million shares. Conservatively, the cost is over HK$40 million, which does not rule out the possibility that the company will continue to repurchase in the future.

However, behind the management's large repurchase, on the one hand, they are optimistic about the company's future development, and on the other hand, because the real value of Tiangong International is clearly undervalued. By the close of trading on May 21, Tiangong International's PB valuation was only 0.64 times, the lowest level in five years, and there is still plenty of room for growth compared to 1.2 times the five-year median value.

Currently, Hong Kong stocks have entered a technical bull market. As the market climate warms up, market capital will continue to explore targets with both growth certainty and undervaluation. At that time, Tiangong International is expected to usher in a value revaluation under basic catalytic direction, and now may be a good time to lay out Tiangong International.