The copper-based special material preparation technology industry is leading the industry. The company is the leading copper-based alloy leader in China. With leading copper-based special material preparation technology, it has become the world's main supplier of high-strength and high-conductivity copper alloy materials and parts, the number one in the medium and high voltage electrical contact materials and products industry. The products are mainly used in medium and high voltage power switches, rail transit motors, etc., and gradually expand the business to emerging sectors such as liquid rocket engine thrust interior walls, CT and DR ball tube components, and optical module chip bases. The customers it serves include Siemens Electric, ABB, Schneider The world's top 500 companies, including Toshiba, Eaton, GE Transportation, France's Alstom, CRRC, State Grid, and Siemens Healthcare.

Business performance is growing steadily, and the continued improvement in reporting indicators is expected to accelerate the release of steady growth in business performance. Revenue in 2023 reached a record high per mother average. The company's revenue and net profit to mother grew steadily in 2020-2023. The compound growth rates were 20.11% and 23.58% respectively, and both revenue and net profit reached record highs in 2023, mainly due to the gradual release of production capacity from fund-raising projects, combined with optimization of the sales structure and improvement of operating quality and efficiency. The 24Q1 company achieved operating income of 287 million yuan, +14.26% year over year, and achieved net profit of 25 million yuan to mother, +13.49% year over year, maintaining a steady growth trend.

The share of the three expenses on the profit statement continues to decline, and the results of improving quality and efficiency have significantly helped release the company's profits.

Since 2020, the company's sales, management, and finance expenses have continued to decline as a share of revenue. The 2023 target was 7.53%, down 0.40 percentage points from 2022, which means that the company's management efficiency continues to improve, and the results of improving quality and efficiency are remarkable, which helps to further release profits. Inventory at the end of the balance sheet period is increasing year by year, and performance is expected to be rapidly released as inventory is actively prepared and prepared for production. 2020-2024Q1's inventory at the end of the period increased year by year. The target for the end of the first quarter of 2024 was 294 million yuan, an increase of 46 million yuan over the end of 2023. We think it reflects that the company has sufficient orders on hand or is in the active preparation stage, and the performance is expected to be released quickly as inventory is digested.

The traditional sector has an outstanding position. Technical advantage+customer advantage has built a strong performance moat. In the first three quarters of 2023, China's railway passenger traffic reached 2,933 billion, a year-on-year increase of 112.4%. However, the number of EMU trains and popular regions were relatively small, unable to meet passenger travel needs during major holidays, and EMU train ownership is expected to continue to increase in the future. The company's high-strength, high-conductivity copper alloy motor end rings and guide bars have been supplied to customers such as CRRC in China and Alstom in France. It is expected that the volume will be accelerated along with the demand for EMU train construction and maintenance and replacement of existing train traction motors.

China's connector market is expected to reach US$29.3 billion in 2023, with a compound growth rate of 5.9% in 2016-2022. Currently, European, American and Japanese companies still dominate the high-end connector market, and there is plenty of room for domestic replacement. The high-strength high-conductivity copper alloy material developed by the company is an important raw material for high-end connector contacts, and is expected to benefit from the increase in the size of the high-end connector market+the acceleration of domestic substitution to achieve continuous growth.

In 2014-2022, the installed capacity of China's full-caliber generators and the electricity consumption capacity of the whole society continued to grow. The compound growth rate reached 8.12% and 5.47% respectively. Demand for medium- and high-voltage electrical contact contacts is expected to maintain rapid growth along with demand for new construction and stock replacement of power generation equipment and transmission and distribution networks. The company is number one in the global medium and high voltage electrical contact materials industry. The domestic market share of the product exceeds 60% and is sold back to the world. It is expected to accelerate the release as downstream demand grows and vacuum switches accelerate the replacement of sulfur hexafluoride switches.

The application of high-performance chromium metal in medium and high voltage electrical contact materials, high-end superalloys, high-end targets, and surface spraying is gradually expanding. The company is the first domestic enterprise to successfully apply low temperature liquid nitrogen technology to mass manufacture and supply low oxygen, low nitrogen, low sulfur, and low acid insoluble high-performance metal chromium powder to the world. The “Project with an annual output of 2000 tons of high-purity metal chromium materials” has been completed and put into operation. The additional production capacity is expected to benefit from downstream market growth and achieve smooth digestion, boosting the company's performance growth.

The business in the emerging sector continues to expand, and forward-looking layout+production capacity investment is building a new growth point for liquid rocket engine thrust interior wall business: The company plans to expand production to add 1100 sets of rocket engine thrust indoor and exterior components per year, which is expected to fully benefit from China's high space launch boom cycle brought about by the booming development of low-orbit satellite internet. CT and DR tube parts business: The company plans to build a production expansion project to achieve the ability to produce 30,000 sets of CT tube components and 15,000 sets of DR ray tube components per year, which is expected to fully benefit from the growth in the size of the CT equipment market in China and the increase in the localization rate.

Optical module chip base business: The company plans to build an expansion project to achieve the ability to produce 20 million sets of optical module bases and 10 million sets of optical module cases per year, which is expected to fully benefit from the increase in tungsten copper alloy penetration rate brought about by increased demand for optical modules and accelerated iteration of high-speed products.

Equity incentives fully stimulate employees' enthusiasm, and the unlocking conditions highlight the company's development confidence. The company's 2023 stock option incentive plan plans to grant 16.8 million stock options to 85 incentive recipients, accounting for about 3% of the company's total share capital when the draft incentive plan was announced. The target value for company-level performance assessment was based on the company's 2023, and the net profit growth rates for 2024 and 2025 were 40% and 100%, respectively. We believe that the implementation of equity incentives binds employees' interests to a high degree and can effectively stimulate employees' enthusiasm for work. At the same time, setting performance assessment targets at the company level fully demonstrates the company's confidence in development and is optimistic about the company's future development.

Profit forecast: In summary, we believe that as a leading copper-based alloy company with leading core technology, the traditional sector is expected to build a strong performance moat based on technical advantage+customer advantage, and the emerging sector is expected to build new performance growth points under forward-looking layout+production capacity investment, and performance is expected to be released at an accelerated pace. It is predicted that in 2024-2026, the company will achieve operating income of 1453/17.98/2,220 million yuan, net profit to mother of 134/176/228 million yuan, corresponding PE of 45.39/34.62/26.71x, giving it a “recommended” rating.

Risk warning: Risk of technology failure to form a product or achieve industrialization, risk of raw material price fluctuations and hedging management risks, risks of changes in the trade environment in overseas markets, risk of project construction progress falling short of expectations.