Key points of investment:

Technical strength creates high barriers and continues to consolidate leading edge

The company is currently one of the enterprises with the most advanced technology and the most complete range of production types in the field of superalloys in China. Multiple product segments dominate the market. The company has established key laboratories and technical research centers, pioneered many cutting-edge technology fields. Through independent research and development of new materials and key technologies, the company has a solid foundation and leading advantage in the field of superalloy R&D and production. At present, the company's R&D investment continues to expand. In 2023, the company invested a total of 275 million yuan, accounting for 8.08% of R&D investment, an increase of 0.58 percentage points over the previous year. Key research projects continue to advance, providing technical reserves for the company's future industrial development.

The industrial chain continues to expand and renew, and the project promotes the release of production capacity

The company's products are positioned in the field of high-end and new superalloys. The industrial chain of the main business company continues to expand, industrial construction continues to advance, the regional layout continues to be optimized, many major investments or construction projects are progressing in an orderly manner, and the production scale is expanding at an accelerated pace. In 2023, the company's annual production of superalloy materials was 21,300 tons, up 34.19% year on year; sales volume was 19,900 tons, up 24.84% year on year. It is expected that the scale of the industry will continue to expand.

Stable downstream business relationships and excellent product pricing capabilities

The stability and reliability of superalloy products is the primary factor, and the time period required for the product to pass customer system certification is 3-5 years. As a leading enterprise in the development of superalloy materials, the company has established long-term stable business relationships with large downstream enterprises through years of business accumulation. The company uses a “sales to determine production” sales model, and also has strong pricing capabilities. Against the backdrop of a sharp rise in raw material prices, some products can transfer some pressure to downstream customers to ensure the company's profitability.

Rapid development in the aerospace field is driving market demand for superalloys. In advanced aero engines, the proportion of superalloys used has reached more than 50%, accounting for about 35% of the value of raw materials. There is great market potential for increasing military aircraft assembly and maintenance stocks. Major domestic aircraft projects for civil aviation are advancing at an accelerated pace, domestic aero engines used in the military and civilian fields have all made progress, and the pace of localization is accelerating. The domestic superalloy gap may reach 28,000 tons in 2022, and the supply growth rate is lower than the growth rate of demand. There is a trend of further widening of the gap, and there is room for domestic replacement of superalloys.

Profit forecasting and investment advice

We expect the company's net profit to be 4.42/5.49/672 million yuan in 2024-2026, respectively, and the corresponding EPS is 0.57/0.71/0.87 yuan/share. Western Superconductivity, Tunan Shares, and Longda Shares involved in the superalloy manufacturing industry were selected. Based on the closing price on May 22, 2024, the average PE predicted by the company for 2024-2026 was 25.3/19.9/16.7 times, respectively. Considering that the company is a leading company in R&D and production of superalloys, the production and R&D strength is leading in the industry. At the same time, construction projects have been put into operation and the production scale continues to expand, which strongly supports the company to seize the growing market opportunities for superalloys, cover it for the first time, and give the company a “buy” rating.

Risk warning

(1) Downstream demand fell short of expectations; (2) raw material prices rose above expectations; (3) production scale expansion fell short of expectations.